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Industrial Competitiveness and Design Evolution pp 97–122Cite as

Product Variety for Effective Demand Creation

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Part of the book series: Evolutionary Economics and Social Complexity Science ((EESCS,volume 12))

Abstract

Product variety is a crucial dimension for successful management. While numerous papers deal with this subject, few provide insights into estimating optimal product variety in a concrete situation. Their results are much too sensitive to the assumptions, and their conclusions are often contradictory. This chapter presents a new method to estimate optimal variety for a firm, which depends on the notion of estimated coverage function, defined and explained in the text in detail. All the complex issues related to optimal variety estimation revolve around the estimation of this function, allowing us to discern which issues are crucial and which are not. The formula obtained here is simple and intuitive, and no similar formula has ever appeared in the literature before. It provides various hints regarding optimal variety estimation by means of costs and sales expectations. The results can be extended to the case of oligopolistic competition, and our investigation is concluded by drawing a comparison between a monopoly case and an oligopoly case.

The main part of this chapter comes from a paper originally published in 2012 under the title “Estimating Optimal Product Variety of Firms,” Evolutionary and Institutionary Economics Review 9(1):11–35. The title has been modified in accordance with the theme of this book, and a few corrections and changes have been made.

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Notes

  1. 1.

    The number of products available today may be even greater. In our opinion, more than one hundred billion commodities were being produced in Japan at the beginning of the twenty-first century.

  2. 2.

    Indeed, one of the reasons why strong preference is not adopted by the majority of papers dealing with the general equilibrium framework is that corner solutions are difficult to analyze within this framework.

  3. 3.

    Clark et al. (1987 p 734) explains that product development goes through four stages: concept generation, product planning, product engineering, and production engineering.

  4. 4.

    At a particular point in time, i.e., at the time of product design, development managers may consider a demand curve with selling price as the independent variable. If the expected sales volumes are too small, the engineers try to deduce the appropriate unit cost in order to obtain satisfactory expected sales volumes. This procedure is widely known as target costing (Monden and Hamada 1991; Kato 1993). Estimating optimal product variety is closely related to this procedure. Yet, the problem is that the target costing procedure comes after the number of variants to be developed is decided. So, when estimating optimal product variety, managers should assume normal development performance (based on their past experience), including cost planning. Sraffa’s principle does not concern this phase of development, since it deals with how daily production volumes are determined after prices are set.

  5. 5.

    Clark and Fujimoto (1991) distinguish between fundamental and peripheral varieties, but no such explicit distinction is made in the present chapter. Readers may assume product variety to be either, although this makes a big difference for production and development management.

  6. 6.

    When N is not an integer, it is necessary to find an integer solution. This problem is discussed in Sect. 2.4.

  7. 7.

    Meade (1974) adopted the terminology number and variety of products, where number stands for what we call variants of products and variety stands for what we call profiles.

  8. 8.

    The panels in Fig. 4 are conceptual ones. They illustrate how best profiles (arrangements of specifications) change when N changes.

  9. 9.

    An evolutionary perspective may be useful as a practical solution for a firm (Sorenson 2000). However, this chapter confines itself to analyzing the decision-making process when all these complications are negligible.

  10. 10.

    See Hotelling (1929) and Lancaster (1990 p 198). Eaton and Lipsey (1975) show that there can be no equilibrium.

  11. 11.

    See also Itoh (1983). Caminal and Granero (2012) compares the cases of multiproduct firms and single-product firms using a spokes model and concludes that multiproduct firms have a competitive disadvantage vis-à-vis single-product firms, which contradicts the observations made in this analysis.

  12. 12.

    Another possible strategy for small firms is to find a niche that is not covered by the products of the big firm.

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Acknowledgments

Professor Takahiro Fujimoto of Tokyo University is gratefully acknowledged for sparking the author’s interest in this topic. Without his encouragement, the author would not have dared start any investigation into product variety.

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Authors and Affiliations

  1. Osaka City University, Osaka, Japan

    Yoshinori Shiozawa

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  1. Yoshinori Shiozawa
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Correspondence to Yoshinori Shiozawa .

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Editors and Affiliations

  1. Graduate School of Economics, The University of Tokyo, Bunkyo-Ku, Tokyo, Japan

    Takahiro Fujimoto

  2. Faculty of Engineering, Information and Systems, University of Tsukuba, Tsukuba, Ibaraki, Japan

    Fumihiko Ikuine

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Shiozawa, Y. (2018). Product Variety for Effective Demand Creation. In: Fujimoto, T., Ikuine, F. (eds) Industrial Competitiveness and Design Evolution. Evolutionary Economics and Social Complexity Science, vol 12. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55145-4_3

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