*We would like to thank Susan Athey, Thomas Ross and Jacques Crémer for useful comments and discussion. We would also like to thank the Editor and three anonymous referees for their helpful suggestions. Whilst preparing this paper, Dana was an associate professor at The Kellogg School of Management, Northwestern University. The views expressed in this paper do not necessarily represent those of the Antitrust Division or the Department of Justice.
PRODUCT VARIETY AND DEMAND UNCERTAINTY: WHY MARKUPS VARY WITH QUALITY*
Version of Record online: 19 NOV 2008
© 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics
The Journal of Industrial Economics
Volume 56, Issue 3, pages 535–552, September 2008
How to Cite
CARLTON, D. W. and DANA, J. D. (2008), PRODUCT VARIETY AND DEMAND UNCERTAINTY: WHY MARKUPS VARY WITH QUALITY. The Journal of Industrial Economics, 56: 535–552. doi: 10.1111/j.1467-6451.2008.00353.x
- Issue online: 19 NOV 2008
- Version of Record online: 19 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.