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Product interactions and rivalry among multiproduct firms : an application of characteristics theory

University of British Columbia

A model based upon the differences in the profitability of producing various combinations of goods is presented as a practical method of analysing product choice by multiproduct firms. Characteristics theory is used to construct the market opportunity frontiers that were formed by fifteen common insecticides during each year between 1944 and 1987. These frontiers, which utilize the three attributes that are used to compare the insecticides in the industry literature, illustrate the combinations of characteristics that the products yield for some budget. Construction of the frontiers provides the first opportunity to check the principal prediction of characteristics theory, that all products are priced to appear on the market opportunity frontiers. The prediction holds during fifteen years of the study. Deviations from the prediction during the other years are due to one product and can be accounted for by the measurement errors of the characteristics. The market opportunity frontiers are also utilized to calculate the implicit prices of characteristics on each facet of the frontier. These prices, and convexity of the frontier, are then used to determine bounds on the prices of eight additional products for which price data are unavailable. A proposition is presented which indicates that a product yields greater profits to a firm producing a product which neighbours it on the market opportunity frontier. Increased profits due to these relationships between certain combinations of products, such as whether they are neighbouring or chemically similar, are also shown to increase the probability that a firm will produce these combinations. Logit estimations are conducted to determine how the relationships between two goods influence the probabilities of a firm introducing or producing both. The empirical results are able to predict (with a 50 to 60% success rate) the identity of the firms which introduced or produced particular products based upon the other products in each firm's portfolio. The principal contributions of this thesis are that it provides the first empirical support for the predictions of characteristics theory and that it presents an approach which allows the empirical analysis of product choice by multiproduct firms.

Text

2010-10-10

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http://hdl.handle.net/2429/29063

Economics

University of British Columbia

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