Economics, politics and business environment
Multiproduct monopoly, variety provision, taste distributions
D42, L12, L15
We investigate a multiproduct monopolist's provision of variety and identify conditions of consumer preferences (demand structure) under which the monopolist over-provides or under-provides variety compared to the second-best, that is, the total welfare maximizing variety constrained by the firm's price/quantity choice. We then illustrate how the previous conditions of under-/over-provision of variety differ if consumers face intrinsic (search) costs to learn their tastes for products. We discuss important applications of this analysis, such as variety provision of retailers and variety provision on e-commerce platforms, like eBay. We also link variety provision to quality provision and illustrate how the monopolist's quality provision compares to the second-best optimal quality, which, for instance, can be used to set minimum quality standards.