Product line extensions and competitive market interactions: an empirical analysis

Line extensions (i.e., the introduction of a new product that is a variation of a firm's existing product) are an important competitive instrument in consumer non-durable products. Using the `new empirical industrial organization' methodology, we examine the impact of a line extension on price competition between two national yogurt manufacturers. We find that the extending firm gains price-setting power. Additionally, the positioning of the line extension grows the combined sales, and raises the average weekly contributions for both the extending firm and the rival firm. We also discuss additional insights into the nature of competition before and after the extension.