The Life Cycle of Products: Evidence and Implications
56 Pages Posted: 2 May 2018 Last revised: 29 Nov 2021
Date Written: February 26, 2019
We exploit detailed product- and firm-level data about the consumer goods industry to document that the sales of individual products decline at a steady pace throughout most of the product life cycle. This pattern is common across heterogeneous types of products and is mostly explained by declines in quantities sold rather than declining prices. We identify the margins that affect the product life cycle using a model-based decomposition of product sales. Our estimates indicate that the systematic decline in sales over time is mostly explained by declines in products appeal. The results are consistent with products quickly becoming obsolete as they face competition from newer products sold by competing firms (business stealing) and competition from newer products sold by the same firm (cannibalization). We build a tractable dynamic model of firm growth in which firms invest in creating new products that impact both its own existing products and the products of competitors. Our model aligns with empirical regularities in the product and firm life cycles, and our quantification shows that firms need to introduce new products to grow; otherwise their portfolios become obsolete as rivals introduce new products of their own. By introducing new products, however, firms accelerate the decline in sales of their own existing products.
Keywords: Product Life Cycle, Firm Dynamics, Multi-Product Firms, Innovation-Obsolescence Cycle
JEL Classification: O31, L11, L25
Suggested Citation: Suggested Citation