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The determinants of product lines

Justin P. Johnson and David P. Myatt

RAND Journal of Economics, 2018, vol. 49, issue 3, 541-573

Abstract: We study product line choice allowing for cost asymmetries but ruling out strategic motivations such as a desire to soften competition. We identify two forces that interact with asymmetric competition to shape equilibrium product lines. Possible outcomes range from head‐to‐head competition to complete separation of product lines and include the intermediate case of partial separation. In an international trade context, we predict which qualities a disadvantaged foreign producer will specialize in. If cost factors drive quality‐based discrimination then foreign firms sell only lower qualities. However, if demand factors are the main drivers then foreign firms sell only high qualities.

Date: 2018
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Handle: RePEc:bla:randje:v:49:y:2018:i:3:p:541-573