Co-Product Technologies : Product Line Design and Process Innovation

The simultaneous production of different outputs (co-products) is observed in the chemical, material, mineral, and semiconductor industries among others. Often, as with microprocessors, the outputs differ in quality in the vertical sense and firms classify the output into different grades (products). We analyze product-line design and production for a firm operating a vertical co-product technology. We examine how the product line and profit are influenced by the production cost and output distribution of the technology. We prove that production cost influences product line design in a fundamentally different manner for co-product technologies than for uni-product technologies where the firm can produce products independently. For example, with co-products, the size and length of the product line can both increase in the production cost. Contrary to the oft-held view that variability is bad, we prove the firm benefits from a more variable output distribution if the production or classification cost is low enough