1 Competition , Innovation , and Product Exit

Why do products exit markets? This paper integrates rationale for product exit from a number of different literatures and compares the statistical and substantive effect of these explanations. We use a novel dataset covering every product introduced into the desktop laser printer industry since its inception. Using hedonic models, hazard rate models, and count models, this study generates three main findings. First, innovation does not drive products out of market per se. Managers do not pull products off the market when they innovate. Rather they seem keep the incumbent products on the market and add the newer, more innovative products to the marketplace. Second, competition has a large impact on driving products out of markets. These non-innovative products remain in the product portfolios of companies until competition and cannibalization drive the products out of markets, not managerial decisions. Third, holding other factors constant, fixed cost and process innovation, while sometimes statistically significant, has a small substantive effect on product exit. This is may be because in differentiated product markets, firms of varying costs can survive. * Sloan School of Management and Department of Economics, respectively (MIT E52-545, 50 Memorial Drive, Cambridge, MA 02142-1347, 617-258-7253, [email protected] or [email protected]; Work reported was supported (in part) by the MIT Center for Innovation in Product Development under NSF Cooperative Agreement Number EEC9529140. We would like to thank Glenn Ellison, Bob Gibbons, Shane Greenstein, Ralph Katz, Dan Levinthal, Jesper Sorensen, Scott Stern, Mary Tripsas, and Whitney Newey for very helpful comments. We would like to thank Jack Nickerson for assistance with the data. All errors are the sole responsibility of the authors.