DP8990 Dynamic Product Diversity

Author(s): Ramon Caminal

Publication Date: May 2012

Keyword(s): demand cycles , product diversity , repeat purchases , transitory saturation

JEL(s): L12 , L13

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP8990.asp.asp

The goal of this paper is to study the frequency of new product introductions in monopoly markets where demand is subject to transitory saturation. We focus on those types of goods for which consumers purchase at most one unit of each variety, but repeat purchases in the same product category. The model considers infinitely-lived, forward-looking consumers and firms. We show that the share of potential surplus that a monopolist is able to appropriate increases with the frequency of introduction of new products and the intensity of transitory saturation. If the latter is sufficiently strong then the rate of introduction of new products is higher than socially desirable (excessive dynamic product diversity).