Separating Vertical from Horizontal Differentiation

We demonstrate that R&D intensity is an appropriate measure of vertical differentiation, while the Rauch (J Int Econ 48:7-35, 1999) classification mainly captures horizontal differentiation. Product market characteristics vary considerably across R&D intensity-based technology levels of the OECD-STI taxonomy, as well as across categories of the Rauch classification. Both high technology and differentiated products display lower price elasticity of demand and longer quality ladders than do low technology and homogeneous products. However, variety proliferation decreases with the technology level and increases with the Rauch category, while price dispersion increases with technology but not with the Rauch. Additionally, Rauch categories do not differ in factor intensities, while higher tech industries are more capital intensive than lower tech ones.

Automated summary

We show that R&D intensity is a suitable measure of vertical differentiation, while the Rauch classification primarily captures horizontal differentiation. Product market characteristics vary significantly across R&D intensity-based technology levels and Rauch categories. Higher technology and differentiated products exhibit lower price elasticity of demand and longer quality ladders compared to lower technology and homogeneous products. However, variety proliferation decreases with technology level and increases with Rauch category, while price dispersion increases with technology but not with Rauch. Additionally, Rauch categories do not differ in factor intensities, while higher tech industries are more capital intensive than lower tech ones.