Skip to main content

Estimating Optimal Product Variety of Firms

Abstract

Product variety is a crucial dimension for successful management. While there are an enormous number of papers on this subject, few give insights on what to do on the estimation of optimal product variety in a concrete situation. Many results are much too sensitive to the assumptions and the conclusions are often contradictory. This paper presents a new method for estimating optimal variety for a firm. The estimation depends on the estimation of expected coverage function, which is defined in the paper. All the difficult problems in the optimal variety estimation are concentrated in the estimation of this function. But this allows people to discern what are crucial and what are not. The formula obtained here is simple and intuitive, and no similar formula has appeared before in the literature. It provides various hints to the optimal variety estimation by means of costs and sales expectations. The result can be extended to an oligopolistic competition case. The paper concludes by making a comparison with monopoly and oligopoly cases.

This is a preview of subscription content, access via your institution.

References

  • Aoki, M. and H. Yoshikawa (2002) “Demand saturation-creation and economic growth,” Journal of Economic Behavior & Organization 48.2: 127–154.

    Article  Google Scholar 

  • Böckem, S. (1994) “A Generalized Model of Horizontal Product Differentiation,” The Journal of Industrial Economics 42.3: 287–298.

    Article  Google Scholar 

  • Brenner, S. (2001) Determinants of product differentiation: A survey, Discussion Paper, Humbolt University, Berlin.

    Google Scholar 

  • Caminal, R. and L. M. Granero (2012) “Multi-product Firms and Product Variety,” Economica 79.314: 303–328.

    Article  Google Scholar 

  • Chamberlin, E. H. (1933) The Theory of Monopolistic Competition, Harvard University Press, Cambridge, MA.

    Google Scholar 

  • Ciarli, T. and A. Lorentz (2010) Product Variety and Changes in Consumption Patterns: The Effects of Structural Change on Growth, Working Paper, Max Planck Institute of Economics.

  • Clark, K. B. and T. Fujimoto (1991) Product Development Performance, Harvard Business School Press, Boston, MA.

    Google Scholar 

  • Clark, K. B., W. B. Chew, T. Fujimoto, J. Meyer and F. M. Scherer (1987) “Product Development in the World Auto Industry,” Brookings Papers on Economic Activity 1987.3: 729–781.

    Article  Google Scholar 

  • de Vries, J. (2008) The Industrious Revolution/Consumer Behavior and the Household Economy, 1650 to the Present, Cambridge University Press, Cambrige.

    Google Scholar 

  • Dixit, A. K. and J. E. Stiglitz (1977) “Monopolistic Competition and Optimum Products Variety,” The American Economic Review 67: 297–308.

    Google Scholar 

  • Eaton, B. C. and R. G. Lipsey (1975) “The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition,” The Review of Economic Studies 42.1: 27–49.

    Article  Google Scholar 

  • Ho, T.-H. and C. S. Tang (eds.) (1998) Product Variety Management: Research Advances, Kluwer Academic Publishers, Boston, MA.

    Google Scholar 

  • Hotelling, H. (1929) “Stability in Competition,” The Economic Journal, 39: 41–57. Reprinted in G.S. Stigler and K.E. Boulding (eds.) (1952) Readings in Price Theory, Richard D. Irwin, Chicago.

    Article  Google Scholar 

  • Itoh, M. (1983) “Monopoly, Products Differentiation and Economic Welfare,” Journal of Economic Theory 31.1: 88–104.

    Article  Google Scholar 

  • Kaufman, S. (2000) Investigations, Oxford University Press, Oxford.

    Google Scholar 

  • Kornai, J. (1980) Economics of Shortage, 2 vols., North-Holland, Amsterdam.

    Google Scholar 

  • Krishnan, V. and K. T. Ulrich (2001) “Product Development Decisions: A Review of the Literature,” Management Science 47.1: 1–21.

    Article  Google Scholar 

  • Helpman, E. and P. Krugman (1985) Market Structure and Foreign Trade, The MIT Press, Mass: Cambridge.

    Google Scholar 

  • Kato, Y. (1993) “Target costing support systems: lessons from leading Japanese companies,” Management Accounting Research 4.1: 33–47.

    Article  Google Scholar 

  • Lancaster, K. J. (1966) “A New Approach to Consumer Theory,” The Journal of Political Economy 74.2: 132–157.

    Article  Google Scholar 

  • Lancaster, K. J. (1990) “The Economics of Product Variety: A Survey,” Marketing Science 9.3: 189–206.

    Article  Google Scholar 

  • Manez, J. A. and M. Waterson (2001) Multiproduct Firms and Product Differentiation: a Survey. Warwick Economic Research Papers. http://go.warwick.ac.uk.wrap

  • Matsumae, T. (2005) “A Study on the Consistency between Empirical Studies and Growth Models with Demand Satiation and Structural Change,” Evolutionary and Institutional Economics Review 1.2: 197–220.

    Article  Google Scholar 

  • Meade, J. E. (1974) “The Optimal Balance between Economies of Scale and Variety of Products: An Illustrative Model,” Economica (New Series) 41.164: 359–367.

    Article  Google Scholar 

  • Monden, Y. and K. Hamada (1991) “Target Costing and Kaizen Costing in Japanese Automobile Companies,” Journal of Management Accounting Research, 3(Fall): 16–34.

    Google Scholar 

  • Murata, Y. (2009) “On the Number and the Composition of Varieties,” The Economic Journal 119.539: 1065–1087.

    Article  Google Scholar 

  • Pasinetti, L. (1981) Structural Change and Economic Growth, A Theoretical Essay on the Dynamics of the Wealth of Nations, Cambridge University Press, Cambridge.

    Google Scholar 

  • Ramadas, K. (2003) “Managing Product Variety: An Integrative View and Research Directions,” Production and Operations Management 12.1: 79–101.

    Article  Google Scholar 

  • Saviotti, P. P. (1996) Technological Evolution, Variety and the Economy, Edward Elgar, Cheltenham.

    Google Scholar 

  • Saviotti, P. P. and A. Pyka (2008) “Product Variety, Competition and Economic Growth,” Journal of Evolutionary Economics 18.3–4: 323–347.

    Article  Google Scholar 

  • Shiozawa, Y. (1990) The Science of the Market Order (in Japanese), Tokyo, Chikuma Shobo.

    Google Scholar 

  • Sorenson, O. (2000) “Letting the Market Work for You: An Evolutionary Perspective on Product Strategy,” Strategic Management Journal 21.5: 577–592.

    Article  Google Scholar 

  • Sraffa, P. (1926) “The Laws of Returns under Competitive Conditions,” The Economic Journal 36.144: 535–550.

    Article  Google Scholar 

  • Thirsk, J. (1978) Economic Policy and Projects, Calrendon Press, Oxford.

    Google Scholar 

  • Watanabe, S. (1969) Knowing and Guessing: A Quantitative Study of Inference and Information, Wiley, New York, pp. 376–377.

    Google Scholar 

  • Waterson, M. (1989) “Models of Product Differentiation,” Bulletin of Economic Research 41.1: 1–24.

    Article  Google Scholar 

  • Witt, U. (ed.) (2001) Escaping Satiation, Springer, Berlin.

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Yoshinori Shiozawa.

About this article

Verify currency and authenticity via CrossMark

Cite this article

Shiozawa, Y. Estimating Optimal Product Variety of Firms. Evolut Inst Econ Rev 9, 11–35 (2012). https://doi.org/10.14441/eier.A2012002

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.14441/eier.A2012002

Keywords

  • multi-product firm
  • product differentiation
  • product diversity
  • Lancaster characteristics space

JEL

  • D42
  • D43
  • L13
  • L23
  • M11
  • O31
  • R32