Product differentiation in a vertical structure

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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.

Bibliographical metadata

Original languageEnglish
Pages (from-to)105-122
Number of pages18
JournalB.E. Journal of Theoretical Economics
Issue number1
Publication statusPublished - 13 Nov 2020

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