spatial entry by product proliferation that blocks profitable niches. In contrast a protected
concentrated market can provide incentives for firms to restrict product variety in order to
optimize the economies of scale. Hence the spatial preemption theory implies that a
contestable market would introduce more new products than a protected concentrated
market. This would again imply a negative relationship between market concentration
and product variety. Since, there is a tradeoff between gains from economies of scale and
gains from serving consumers’ preference for variety, the welfare implications of the
theoretical models are sensitive to the assumptions about economies of scale and demand
specifications (Lancaster, 1990) 2.
Innes (2006)3 provides a new perspective about the product introduction decisions
of firms and its relationship with market concentration. This theory argues that under a
given antitrust regime (that defines the maximum permissible market concentration),
where mergers determine the resulting market concentration, anticipation of merger and
the consequent level of profit provide incentives for fringe firms to enter and introduce
new products. Thus it implies a positive relationship between product variety and
concentration as product introductions are expected to increase mergers that lead to
increase in market concentration.
In sum, whether market concentration promotes or reduces product variety is an
empirical question. However the empirical literature on this issue is scarce. Studies have
been conducted to analyze the effect of market concentration on product introduction or
product variety using data from the US food (Connor, 1981; Zellner, 1989; Roder,
2 The evolution of the theoretical literature analyzing the implication of different market structures on
product variety and their welfare implications are well summarized by Lancaster (1990).
3 The main objective of the paper is to compare the flexible manufacturing versus inflexible manufacturing
production process and analyze the welfare implications where anticipation of mergers influences the entry
and product introduction decisions of the firms.
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