Product Variety and Retail Structure

Marie-Laure Allain and Patrick Waelbroeck

No 2006-21, Working Papers from Center for Research in Economics and Statistics

Abstract: We examine the impact of horizontal and vertical market structure on product variety. Weconsider a market for horizontally differentiated products where the cost of launching a newproduct is fixed and spread between the manufacturing and the retail industries. We show thata vertically integrated firm offers a wider variety of products than a chain of monopolies. Ifthe cost of launching a new product is equally shared among the vertical structure or mostlysupported by upstream firms, retail competition partially restores the incentives to innovate.Yet when this cost is mostly supported by the retail sector, downstream competition may leadto even more innovation than vertical integration. In both cases, retail concentration reducesproduct variety.

Pages: 32
Date: 2006
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