Concentration, Product Variety and Entry-for-Merger: Evidence from New Product Introductions in the U.S. Food Industry

Competing theories in industrial organization predict that more concentrated industries will lead to a smaller and more efficient variety of products, or alternately, a larger and less efficient array of products. This paper presents an empirical study of these competing implications that estimates the impact of market concentration on new product introductions in a panel of nine food processing industries over 1983 to 2004. Controlling for industry-level unobservables (using fixed effects) and endogeneity of industry market structure, we find that industry concentration promotes the introduction of new products. Preliminary evidence also suggests that new product introductions spur subsequent food industry mergers. Both conclusions are consistent with the “entry for merger” theory of product variety wherein small firms introduce new products in anticipation of profitable future mergers with concentrated firms.