Product Differentiation, Industry Concentration and Market Share Turbulence

Building on the current theory of industrial concentration, we analyze the
relation between market size and product differentiation, and show how product differentiation
impacts market share turbulence. We first propose that in markets where vertical
product differentiation dominates, firms will have an incentive to escalate investment in
advertising and/or R&D as market size increases. Secondly, such (firm-specific) investments
will make competitive advantage more sustainable as the firm is less imitable. This
will not be the case if the market is primarily characterized by homogeneous products or
horizontal product differentiation. Our predictions are tested using an original EU
dataset for 1987 and 1997. Our results strongly support our predictions - the degree of
market share turbulence increases with market size. However, this relation is weakened by
competitive investment in advertising and R&D