December 11, 2011

Economics of Multiple Products - Economics for CEOs

Product policy, promotional policy and pricing policy are three important business policy decisions.

Microeconomic theory has been developed on the premise that each firm makes only one product.

Managerial decision problem of product coverage in the case of multi-product firm was discussed from an economic viewpoint by Joel Dean in chapter 3 of his book.

Why does a firm decide to produce multiple products?

Excess capacity of a firm in certain production facilites (or managerial facilties) [due to indivisibility of certain facilities]
Secular shifts[Demand for existing product has come down due change in tastes and hence excess capacity appears].
Vertical integration
Research [research finds certain technologies that reduce production times and thereby create excess capacity or it develops new products that make existing products obsolete and thus create excess capacity]

Policy on Adding New Products

Policy on Dropping Old Products

Why does the problem arise?
Product obsolescence caused by basic changes in consumer taste or by striking improvements in rivals' products forces firm to think of dropping existing products.

Managerial Economics by Joel Dean

Originally posted at

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