Date Added: Jan 2010
Conventional wisdom suggests that a firm's profits will decrease when a competitor expands its product line because the firm's sales will decrease in the presence of the new product. This paper shows that this intuition is incomplete because a competitor's product-line expansion can soften price competition. Thus, one firm's product-line expansion can cause all firms to be more profitable. The analytical model demonstrated the possibility of profit-increasing competitor entry. Author then present conditions under which a competitor's product-line expansion increases profits under two common empirical models: the mixed-logit and geographic spatial models. The results suggest that profit-increasing competitor entry is not only a theoretical possibility, but also a realistic empirical prediction. Geographic competition is especially conducive to this result.