Firm size and diversification: Multiproduct firms in asymmetric oligopoly

This paper presents an oligopoly model of multiproduct firms in which firms are endowed with possibly different marginal cost and product quality, and choose product ranges before product market competition. Consistent with empirical evidence on a positive relationship between firm size and product diversification, the analysis suggests that firms with higher quality-cost margins typically have both larger size and larger product ranges. The main results are proved for Cournot competition and linear demand with differentiated products. They also hold for duopoly under Bertrand competition in the nested multinomial logit model, and, under some restrictions, for Bertrand competition with linear demand.