Product line competition

Abstract

This paper studies product line competition in a simple model of a duopoly. There are two identical firms each of whom must choose a line of product qualities and supply quantities for each product in the line. They face consumers who prefer a higher quality product to a lower quality product but differ in how much they are willing to pay for quality. For the firms, a higher quality product is more costly to produce than a lower quality product. The basic question analyzed is the nature of product line competition. Will the firms choose to segment the market — one firm producing a line of lower quality products and the other firm producing a line of higher quality products — or will they interlace their products? Also, how is consumer welfare affected by these alternative ways of product line competition?