Monopoly and Product Diversity: The Role of Retailer Countervailing Power
We analyse a monopolist’s choice of product diversity and the effects of retailer countervailing power on that choice. We show that monopoly causes distortion in product diversity even after we take into consideration the effects of monopoly pricing. Specifically, the number of differentiated goods produced by the monopolist is smaller than that of the constrained social optimum. Retailer countervailing power lowers consumer prices but reduces product diversity. Consequently, it alleviates the distortion in prices but exacerbates the distortion in product diversity. In our model the former is outweighed by the latter and countervailing power makes consumers worse off. Therefore, price changes do not tell the whole story about how consumers are affected by countervailing power.