Multiproduct Duopoly with Vertical Di¤erentiation

The paper investigates a two-stage competition in a vertical di¤erentiated industry, where each …firm produces an rbitrary number of similar qualities and sells them to heterogeneous consumers. We show that, when unit costs of quality are increasing and quadratic, each …firm has an incentive to provide an interval of qualities. The finding is in sharp contrast to the single-quality outcome when the market coverage is exogenously determined. We also show that allowing for an interval of qualities intensi…es competition, lowers the profi…ts of each fi…rm and raises the consumer surplus and the social welfare in comparison to the single-quality duopoly.