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The Effects of Product Line Breadth: Evidence from the Automotive Industry

Using a detailed data set from the U.S. automotive industry, we enrich the existing literature on product line breadth with new results that highlight previously unexplored operational aspects of its benefits and costs. We find that expanding product line breadth has a significant effect on increasing mismatch costs arising from the increased demand uncertainty associated with product proliferation. These mismatch costs are manifested through additional discounts and inventories. The effect of product line breadth on mismatch costs is comparable in magnitude to the effect on production costs, suggesting that the operational benefits of inventory pooling achievable by rationalizing product lines can be very substantial. Furthermore, we quantify the benefit of using a platform strategy to mitigate the effects of a broad product line on production costs. Finally, we propose an additional, attribute-based measure of product line breadth and find that product line breadth can work as a hedge against changes in demand conditions. For example, automakers that offer a broader range of fuel economy levels increase their market share and reduce their average discounts as gas prices become more volatile.