Market Segmentation and the Sources of Rents from Innovation: Personal Computers in the Late 1980s

By T. Bresnahan, Scott Stern, M. Trajtenberg. 2013

225 citations recorded by the source corpus.

This paper evaluates the sources of transitory market power in the market for personal computers (PCs) during the late 1980's. Our analysis is motivated by the coexistence of low entry barriers into the PC industry and high rates of innovative investment by a small number of PC manufacturers. We attempt to understand these phenomena by measuring the role that different principles of product differentiation (PDs) played in segmenting this dynamic market. Our first PD measures the substitutability between Frontier (386-based) and Non- Frontier products, while the second PD measures the advantage of a brand-name reputation (e.g., by IBM). Building on advances in the measurement of product differentiation, we measure the separate roles that these PDs played in contributing to transitory market power. In so doing, this paper attempts to account for the market origins of innovative rents in the PC industry. Our principal finding is that, during the late 1980's, the PC market was highly segmented along both the Branded (B versus NB) and Frontier (F versusNF) dimensions. The effects of competitive events in any one cluster were confined mostly to that particular cluster, with little effect on other clusters. For example, less than 5% of the market share achieved by a hypothetical entrant would be market-stealing from other clusters. In addition, the product diffe- rentiation advantages of B and F were qualitatively different. The main advantage of F was limited to the isolation from NF competitors it provided; Brandedness both shifted out the product demand curve as well as segmenting B products from NB competition. These results help explain how transitory market power (arising from market segmentation) shaped the underlying incen- tives for innovation in the PC industry during the mid to late 1980s.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/b244c87bdb3b1f557410dcec1fa3963d3ba4f099

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

Citations in the corpus

Liberalizing A Distribution System: The European Car Market (2006, background): “The elimination of price discrimination may sometimes lead to prices that are below all the discriminatory prices; see Thisse and Vives’ (1988) location model, and Corts’ (1998) model with “all-out competition”. Furthermore, eliminating price discrimination may sometimes raise the firms’ profits; se”
Research on Innovation: A Review and Agenda for Marketing Science (2006, background): “Bresnahan et al. (1997) study the market for personal computers in the 1980s to show that differentiation leads to an ability to earn excess profits by insulating brands from competitive response.”
Measuring Substitution Patterns in Diﬀerentiated-Products Industries (2019, unknown): “Finally, we introduce a second simultaneity problem into the model (i.e. endogenous prices), and illustrate the construction and performance of Differentiation IVs in this important case.”
Affirmative Action in Higher Education: How do Admission and Financial Aid Rules Affect Future Earnings? (2005, background): “Examining columns (1) and (6) show that blacks who attended college performed over fifty points worse on both the math and verbal sections of the SAT34 than whites in the population at large.”
Measuring Word of Mouth's Impact on Theatrical Movie Admissions (2007, methodology): “Bresnahan et al. (1997) introduced the Principles of Differentiation Generalized Extreme Value to address multiple types of consumer heterogeneity simultaneously.”
Merger Simulation in Competition Policy: A Survey (2010, unknown): “For details see Bresnahan et al. (1997).”