DP446 Product Line Competition and Shopping Costs: Why Firms May Choose to Compete Head-to-Head
Consider firms each selling a range of products, when each consumer prefers to concentrate his purchases with a single supplier because of the `shopping costs' of using additional suppliers. If the firms offer different product ranges, some consumers will nevertheless use multiple suppliers to increase product variety and, since these consumers' purchases will be sensitive to the difference in firms' prices, the market may be quite competitive. If however, firms offer identical product ranges, no consumer will want to purchase from more than one firm (given the shopping costs) and the market may therefore be less competitive and equilibrium prices higher. This contrasts with the standard economic intuition that firms selling single products minimize competition by differentiating their products.