TAILIEUCHUNG - Competition and Quality Choice in the CPU Market 

Botswana has some of the largest and most valuable diamond mines in the world, such as Jwaneng and Orapa, both of which started production in the early 1970s. The Botswana government has a 50 percent share of each mine. Diamond mining has given Botswana a tremendous boost. One of the poorest countries in the world when it gained independence, in 1966, Botswana today is among the richest in Africa, with diamond-related activities accounting for nearly one-third of the country’s gross domestic product (GDP). Another interesting story lies in Australia. In 1979 geologists discovered the largest diamond deposit in the world by. | Competition and Quality Choice in the CPU Market Chris Nosko Harvard University November 2010 Abstract This paper uses the CPU market to study how multiproduct firms generate returns from innovation. Using a new dataset I estimate a discrete-choice model of CPU demand and then recover estimates of the sunk cost of product introductions. I combine these estimates with a model of firm product choice to examine how product line decisions change with asymmetric technological capabilities and with the competitive environment. I use the model to show how technological leaders can use product lines as strategic weapons isolating competition to less desirable areas of the product spectrum. I apply this insight to a large shift in technological leadership - Intel s introduction of the Core 2 Duo - and quantify the portion of returns that came from Intel s ability to push its principle competitor AMD into lower-margin product segments. I find that competition plays a key role in determining firms product line decisions and that these decisions are important in generating returns from innovation. Ignoring endogenous product choices leads to underestimates of the social welfare losses from monopoly. I am grateful to Ulrich Doraszelski Lisa Kahn Greg Lewis Julie Mortimer Ariel Pakes and Alan Sorensen for invaluable advice. Also I thank Brett Gordon for his help in putting together the pricing data Che-Lin Su for helpful discussions about computational methods and especially Jeremy Davies of Contextworld for generously supplying downstream data. All errors are solely mine. 1 1 Introduction When firms innovate they often don t just introduce products at the top-end of the market. Instead they tend to reset their whole product line in an effort to extract the most possible profit from their innovation. Their incentives to reshape lower market segments depend on the industry structure especially whether it is a monopoly or an oligopoly and the technological capabilities of rival .

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