Working Paper: CEPR ID: DP5938
Authors: Ramn Caminal
Abstract: The goal of this paper is to examine the role of multiproduct firms in the market provision of product diversity. The analysis is conducted within the spatial model of nonlocalized competition proposed by Chen and Riordan (2006). It turns out that the effect of multiproduct firms on product diversity depends on the size distribution of firms. Under duopoly, product diversity is lower than under monopolistic competition. Nevertheless, the number of varieties can still be socially excessive. In contrast, if a large multiproduct firm (incumbent monopolist) competes against a large number of small (single product) firms then product diversity is higher than under monopolistic competition. Moreover, the incumbent firm is unable to monopolize the market and deter entry.
Keywords: Monopolistic competition; Multiproduct firms; Product diversity; Spatial models
JEL Codes: D43; L12; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| multiproduct firms (under duopoly) (D43) | product diversity (L15) |
| structure of competition (L11) | product diversity (L15) |
| large multiproduct firm competing against many small single-product firms (L19) | product diversity (L15) |
| presence of a large firm (L25) | positive externality (D62) |
| positive externality (D62) | product diversity (L15) |
| cannibalization effect (D16) | product diversity (L15) |
| strategic price effect (D49) | product diversity (L15) |