Competition in Product Lines

We analyze competition in product lines by multi-product oligopolists. The firms are assumed to have preferential access to a local market but can supply the rival’s market by incurring distance or product adaptation costs. We show that the width and degree of overlap in the product lines chosen by these firms is greater in large markets and when the products being offered are viewed by consumers as being more differentiated. This reflects a tension between two effects: the desire to “be where the demand is” and the desire to weaken competition and intra-firm product cannibalization. Distance costs are shown to affect not only the desire to supply the distant market but also the firms’ product line choices. Product lines are broader and more overlapped when distance costs are low and when they are high; while product lines are narrower, with less overlap, when distance costs are moderate. JEL Codes: D43, F12, L13