Consumers' preference to concentrate business with a single supplier may arise from the transaction costs of establishing new trading relationships, the learning costs of using goods from a new supplier, costs caused by incompatibility of products, uncertainty about the quality of untested brands, or simple feelings of loyalty. In Discussion Paper No. 835, Research Fellow Paul Klemperer and Research Affiliate Jorge Padilla show that this may give suppliers an incentive to offer `too much' variety. A firm that offers an `extra' product may also capture business from rival firms for other products; extending its product line may even completely foreclose competitors' sales in other markets.

Klemperer and Padilla demonstrate that their model may justify the European Commission's recent decision to ban the proposed merger between the commuter aircraft manufacturers Aerospatiale-Alenia and de Havilland. This is because airlines prefer to operate fleets purchased from a single manufacturer to economize on training and maintenance costs; none of the competitors provided a `full line' of products (aircraft of all three sizes in the generally accepted sub-division of this market). Similarly, since shops exist to reduce consumers' transactions costs by offering a variety of products at a single location, opening on Sunday may also capture the weekday business of consumers who prefer to visit stores with which they are familiar. This may provide a rationale for forbidding the introduction of a new product or banning Sunday shopping as appropriate public policy in some cases. This theory may also be applied to consider the numbers of routes airlines offer and activities regulators permit banks to undertake; and it is relevant to current concerns that the London Stock Exchange may be stifling its continental competitors by allowing a much greater range of financial products to be traded.

Do Firms' Product Lines Include Too Many Varieties, and Do Shops Open Too Many Days?
Paul Klemperer and A Jorge Padilla

Discussion Paper No. 835, August 1993 (AM)