Review of Industrial Organization (2005) 26: 27–59 © Springer 2005
Model Exit in a Vertically Differentiated
Market: Interﬁrm Competition versus Intraﬁrm
Cannibalization in the Computer Hard Disk
CHRISTOPHER S. RUEBECK
Department of Economics and Business, Lafayette College, Easton PA 18042, USA
Abstract. What characteristics of a product’s local market make its withdrawal more
likely? This study investigates the importance of intraﬁrm “cannibalization” of a prod-
uct’s demand by products manufactured by the same ﬁrm versus interﬁrm competition
from others’ products. While both forces impact product withdrawal, cannibalization has
a more robust and signiﬁcant effect. Hedonic price regressions also reveal higher discount-
ing of older models’ quality-adjusted prices, strengthening the argument for caution when
treating list prices as proxies for transaction prices.
Key words: differentiated products, exit, hedonic price index, transaction prices, variable
hazard rate, withdrawal.
JEL Classiﬁcations: C25, C41, D43, L11, L13, L23, L63, O33.
As a multiproduct ﬁrm considers its rivals’ products and whether or not
sufﬁcient buyers exist for the ﬁrm’s own products, it must be concerned
with both substitution to other ﬁrms’ products and substitution among
the ﬁrm’s own products. In a shrinking market, both of these two con-
cerns would appear to impact the ﬁrm’s decision to maintain or withdraw
a product, but is interﬁrm competition or intraﬁrm “cannibalization” more
important in determining the timing of a product’s exit? This question is
particularly interesting in high-tech product markets where model-level exit
is frequently observed.
Multiproduct ﬁrm behavior, in particular the ﬁrm’s internalization of
cross-price effects between its products, has proven to be a challenge
for theoretical study; there is little literature to serve as a guide to the
empirical study of product exit. Theory has considered product location (in