Quality and Quantity Competition in a Multiproduct Duopoly

This article proposes a Cournot model of two-stage competition to examine the patterns of vertical product differentiation in a multiproduct duopoly. Firms simultaneously choose the number of products and their qualities at the first stage and compete in quantities at the second stage. We show that when the fixed setup cost of a product is high enough to result in a monopoly outcome, the monopolist always sells a single product. Moreover, in any equilibrium of a multiproduct duopoly, quality differentiation between them will develop into a nonsegmented pattern because each firm desires to avoid a strong effect of cannibalization. The set of equilibria reveals the properties of quality differentiation between multiproduct firms. In a multiproduct duopoly, the profit from a high-quality product can be lower than that from a low-quality product. This finding sharply contrasts with the literature on single-product firms, which finds the high-quality advantage.