Equilibrium Product Lines: Competing Head-to-Head May Be Less Competitive

Paul Klemperer

American Economic Review, 1992, vol. 82, issue 4, 740-55

Abstract: The author suggests a new model of demand for variety that explains why competing firms may choose very similar product lines: if firms offer different product ranges, some consumers use multiple suppliers to increase variety and, since these consumers' purchases will be sensitive to the difference in firms' prices, the market may be fairly competitive. If, instead, firms offer identical product ranges, each consumer purchases from one firm only because of costs of using additional suppliers, so the market may be less competitive and equilibrium prices higher. This contrasts with the standard intuition that firms minimize competition by differentiating their products. Copyright 1992 by American Economic Association.

Date: 1992
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