18 Pages Posted: 12 Nov 2008
We demonstrate that demand uncertainty can explain equilibrium product variety in the presence of sunk costs. Product variety is an efficient response to uncertainty because it reduces the expected costs associated with excess capacity. We find that within the firm's product line, the highest quality product has the highest profit margin but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. Both of these relationships are consistent with evidence available from marketing studies.
Suggested Citation: Suggested Citation
Carlton , Dennis W. and Dana, James D., Product Variety and Demand Uncertainty: Why Markups Vary with Quality. The Journal of Industrial Economics, Vol. 56, Issue 3, pp. 535-552, September 2008. Available at SSRN: https://ssrn.com/abstract=1299273 or http://dx.doi.org/10.1111/j.1467-6451.2008.00353.x
This is a Wiley-Blackwell Publishing paper. Wiley-Blackwell Publishing charges $38.00 .
File name: joie.
If you wish to purchase the right to make copies of this paper for distribution to others, please select the quantity.