Product choice with economies of scope

This paper develops a model in which two competing firms on a bounded line each sell two products. Production costs for each firm are lower the closer are its two products. It is shown that there may be anywhere from zero to three possible equilibrium configurations. Equilibrium may entail market segmentation, market interlacing or an intermediate case. The paper contributes to two bodies of literature: (i) Industrial organization. When the line is interpreted as a one-dimensional characteristic space, the model provides an appealing explanation of economies of scope in multi-product firms. (ii) Firm location theory. The model relaxes the unrealistic assumption made in spatial models that each firm has a single outlet and obtains significantly different results.