Price competition and quality differentiation with multiproduct firms

This paper examines a two-stage competition where firms simultaneously choose the number of products and qualities in the first stage, and then compete in prices. It is shown that a monopolist must sell a single product. In addition, in any equilibrium of multiproduct duopoly, there are segmented patterns of quality differentiation. Entangled configurations never emerge because each firm has an incentive to reduce the number of products facing direct competition with its rival. This result contrasts sharply with the equilibrium of non-segmented quality differentiation when firms compete in quantities. Furthermore, we find that the high-quality firm never offers more products than the low-quality firm, and quality differentiation between firms is greater than that within a firm.