DP5938 Too Many or Too Few Varieties? The Role of Multiproduct Firms

Author(s): Ramon Caminal
Publication Date: November 2006
Keyword(s): monopolistic competition, multiproduct firms, product diversity, spatial models
JEL(s): D43, L12, L13
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5938

The goal of this paper is to examine the role of multiproduct firms in the market provision of product diversity. The analysis is conducted within the spatial model of nonlocalized competition proposed by Chen and Riordan (2006). It turns out that the effect of multiproduct firms on product diversity depends on the size distribution of firms. Under duopoly, product diversity is lower than under monopolistic competition. Nevertheless, the number of varieties can still be socially excessive. In contrast, if a large multiproduct firm (incumbent monopolist) competes against a large number of small (single product) firms then product diversity is higher than under monopolistic competition. Moreover, the incumbent firm is unable to monopolize the market and deter entry.