Product Differentiation in a Vertical Structure

Abstract

We consider final goods producers’ preference for horizontal product differentiation in the presence of strategic input price determination. Final goods producers may not prefer maximal differentiation but may prefer moderate differentiation under both Cournot and Bertrand competition in the final goods market if product differentiation does not increase the market size significantly and there is either free entry in the input market or the input supplier has increasing returns to scale technology. Thus, we provide a new rationale for moderate product differentiation. Our reasons are different from the existing reasons of mixed pricing strategy, endogenous leadership, no-buy option for the consumers and the relative performance incentive schemes.

Location of Firms and Outsourcing

“…There is a study analyzing equilibrium product differentiation in non-spatial models. See Han et al (2022) [35] and the references therein. However, that study neither shows the effects of the distance between the input suppliers and different types of transportation costs nor considers the effects of bi-sourcing.…”