TY  - JOUR
AU  - Carlton,Dennis W.
AU  - Dana,James D.
TI  - Product Variety and Demand Uncertainty
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10594
PY  - 2004
Y2  - June 2004
UR  - http://www.nber.org/papers/w10594
L1  - http://www.nber.org/papers/w10594.pdf
N1  - Author contact info:
Dennis W. Carlton
Booth School of Business
University of Chicago
5807 S. Woodlawn Ave.
Chicago, IL 60637
Tel: 847/217-6000
Fax: 312/322-0262
E-Mail: dennis.carlton@chicagobooth.edu
AB  - We show that demand uncertainty leads to vertical product differentiation even when consumers are homogeneous. When a firm anticipates that its inventory or capacity may not be fully utilized, product variety can reduce its expected costs of excess capacity. When the firm offers a continuum of product varieties, the highest quality product has the highest profit margins but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. We derive these results in both a monopoly model and a variety of different competitive models.  We conclude with a discussion of empirical predictions together with a brief discussion of supporting evidence available from marketing studies.
ER  -