1. Introduction
Wide range of product variety in consumer goods has become a hallmark of
economic progress. The effect of market structure on product variety has drawn the
attention of economists for a long time. In an extensive theoretical literature on the effect
of market concentration on product variety, predictions are conflicting. The empirical
evidence is sparse with little agreement across studies. In this study we analyze the effect
of market concentration on product variety1 using data from US processed food
industries. We test a new theoretical prediction that provides an alternative explanation
for the surge of new product introductions. Additionally, we employ an extensive annual
panel data and account for potential endogeneity of market concentration that distinguish
our study from the prior empirical studies on the US food industry
In the extant theoretical literature on market structure and product variety, one
strand of models suggest that more competitive (less concentrated) industries introduce
more new products as firms seek to create market niches in the product space, essentially
eroding rents with a high degree of product variety (e.g., Salop, 1979; Raubitschek,
1987). This theory views new product introduction as a competitive tool and predicts that
market concentration is inversely related with product variety.
Another theory argues that markets threatened by potential entry, incumbent firms
introduce an increased variety of products that are close in product space in order to
crowd the market (Schmalensee, 1978; Lancaster, 1979; Eaton and Lipsey, 1979). This
conjecture, known as the ‘spatial preemption’ theory, thus implies that firms preempt
1 Product variety is a net result of product introductions and product failures i.e. Product variety = Existing
products + New Product Introductions - Product Failures. Our study focuses on number of new product
introductions (NPI). We assume that the NPI are proportional to the product variety, hence we can test the
theoretical predictions of the models that are based on product variety.