The dynamics of product differentiation in the British record industry

The paper conducts a statistical analysis of the dynamics of the sale of new music (product differentiation innovation) in the record industry. In pursuing this goal the paper generates new data and analyses a previously unutilized data set. The paper finds that there is a strong correlation between new music innovation in the audio singles and albums market. This is found to be mainly concurrent in the same quarter and to have a reasonably short product life. The paper discovers that these features also characterise the dynamics of record company performance. The research indicates that record companies are willing to sell singles at a loss due to advertising rather than learning externalities. At the industry level, the paper finds that new music innovation does not effect market size significantly and mainly causes ‘business stealing’ effects between record companies, with exceptional cases of multiplier effects. Copyright Kluwer Academic Publishers 1996music industry, product differentiation, econometric methodology, demand,