Determinants of product lines

Johnson, J P and Myatt, D P (2018) Determinants of product lines. RAND Journal of Economics, 49 (3). pp. 541-573. ISSN 0741-6261

Abstract

We study the determinants of product lines in a multi-product Cournot model which allows for cost asymmetries and which eliminates strategic motivations (such as a desire to soften competition) for product-line choice. We identify two distinct forces that lead firms to offer multiple qualities. We then investigate how the interaction of asymmetric competition with these forces shapes equilibrium product lines. Our model predicts a rich variety of possible outcomes, ranging from headto-
head competition (in which all firms offer all products) to complete separation of product lines (so that no product is offer by two or more firms) and including the intermediate case of partial separation. In an international trade context, we predict whether a disadvantaged foreign producer will specialize in higher or lower qualities. If cost factors are the main drivers of quality-based discrimination (so that there are
decreasing returns to quality) then foreign firms sell only lower qualities. However, if demand factors are the main drivers (so that, other things equal, the demand for
higher qualities is less elastic) then foreign firms sell only high qualities.