Spatial location and industry market structure: An empirical analysis of the personal computer market

Although most industries are composed of multiproduct firms producing heterogeneous goods, economic literature tends to abstract from the reality by assuming single-product firms, each manufacturing an identical commodity. Quality differences are often ignored. In this dissertation, an empirical analysis of spatial location and demand elasticities is carried out for a premier multiproduct industry with differentiated products, the personal computer industry, using a panel data. The study presents new applications of hedonic methods in industrial organization. Using hedonic coefficients as weights on individual characteristics, the multidimensional vector of attributes of each personal computer model is projected onto a unidimensional quality scale, and hedonic residuals serve as a measure of over/underpricing.;The first part of the study concerns model entry and exit. Firm-level decisions regarding where to locate new models in the existing product space are empirically examined. Significant differences in the spatial location are found between incumbents and entrants. Both model overpricing and brand reputation effects are found to be significant in affecting model exit from the market.;Demand elasticities for individual computer models, taking into account each product's quality and its location in product space, are estimated in the second part of the dissertation. Differences among products are modeled as distances in the linear, vertically-differentiated quality space. Instead of restricting each model's competition to the two nearest products, the cross-elasticities are allowed to diminish with distance in the quality space. We find that two-stage least squares estimates of demand elasticities are consistent with the observed changes in market structure over the 1976-88 period. Using the estimated elasticities, implied price-cost margins are obtained, and are found to have declined significantly as the industry became more competitive.;In the final chapter, the data for 1989-91 are incorporated, and most of the above findings are confirmed. Since both model and firm turnover increased greatly, hedonic residuals do not predict exit in the later part of the sample. Despite a higher number of products on the market, however, spatial location patterns between incumbents and entrants remained similar. Estimates of demand elasticities and price-cost margins follow previous trends, consistent with the changes in the market structure.