61

We examine the impact of horizontal and vertical market structure on product variety. We consider a market for horizontally differentiated products where the cost of a new-product launch is fixed and spread between the manufacturing and retail industries. We show that a vertically integrated firm offers a wider variety of products than a chain of monopolies. If the launch cost is shared equally across the vertical entity or supported mainly by manufacturers, inter-vendor competition partially restores the incentives to innovate. By contrast, when most of the cost is borne by the retail sector, competition between merchants may foster even more innovation than vertical integration. In both cases, retail concentration reduces product variety.