An empirical model of dynamic attribute-space competition

Multiproduct firms periodically sell new products and remove existing products from the market. The decision whether to launch a new product is intrinsically dynamic: managers are required to assess whether the future cash flow generated by future sales of new products can compensate for the current investment effort. They also need to consider the potential cannibalization of the sales of the other brands in the portfolio and anticipate the competitive response of other firms in the market. In this paper we empirically investigate the mechanism underlying the launch and positioning of new products. We develop a model of multiproduct firms who periodically decide whether and where to launch new products and whether to remove existing products. Products compete over a multi-attribute space, which is made of different possible locations; firms decide in which location to introduce new products in order to dynamically optimize their discounted future expected profit. The model is applied to the U.S. ready-to-eat breakfast cereal industry. By estimating the dynamic structural model we disclose the firms' new product strategies and recover the primitives of the industry; these in turn allow us to predict the change in the strategic decisions taken by firms for different market scenarios. The framework presented in this paper can also be applied as a decision-making tool for product portfolio management and brand positioning.