Shapes as Product Differentiation: Neural Network Embedding in the Analysis of Markets for Fonts

TL;DR

This paper introduces a novel method to quantify unstructured product attributes, specifically font shapes, using neural network embeddings, and analyzes how mergers influence design diversity in a high-dimensional product space.

Contribution

It develops a new framework for measuring high-dimensional product attributes with neural network embeddings and applies it to study merger effects on font design diversity.

Findings

Merger increases visual variety of font designs.

Traditional structured data measures fail to capture design changes.

Neural embeddings effectively quantify unstructured product attributes.

Abstract

Many differentiated products have key attributes that are unstructured and thus high-dimensional (e.g., design, text). Instead of treating unstructured attributes as unobservables in economic models, quantifying them can be important to answer interesting economic questions. To propose an analytical framework for these types of products, this paper considers one of the simplest design products-fonts-and investigates merger and product differentiation using an original dataset from the world's largest online marketplace for fonts. We quantify font shapes by constructing embeddings from a deep convolutional neural network. Each embedding maps a font's shape onto a low-dimensional vector. In the resulting product space, designers are assumed to engage in Hotelling-type spatial competition. From the image embeddings, we construct two alternative measures that capture the degree of design differentiation. We then study the causal effects of a merger on the merging firm's creative decisions using the constructed measures in a synthetic control method. We find that the merger causes the merging firm to increase the visual variety of font design. Notably, such effects are not captured when using traditional measures for product offerings (e.g., specifications and the number of products) constructed from structured data.