New products and market competition

Using a novel data set on new product introductions in U.S. manufacturing, the paper studies the relationship between new product introductions and the intensity of market competition as it is measured by industry-specific price-cost margins. New product introductions intensify market competition and depress price-cost margins. These results draw significant empirical support from a sample of five U.S. manufacturing industries. A 10 percent increase in the number of new product introductions causes price-cost margins to drop by approximately 0.5 percent. Although price-cost margins appear procyclical with respect to fluctuations in industry sales, new products make price-cost margins less procyclical and therefore, the intensity of market competition more procyclical.The author would like to thank the Board of Research at Babson College for their generous financial support. The author would also like to thank Jane Cloran for assisting with some of the data. All of the remaining errors are the responsibility of the author.