Upstream market power and product line differentiation in retailing

We analyze a model of vertical differentiation in which retailers compete in product lines and may purchase a high quality good from a monopolist. The low quality good is produced by a competitive fringe. Depending on quality and cost differentials, the product lines chosen by retailers in equilibrium are either identical, completely different or partially overlapping. In the absence of upstream market power, the unique equilibrium is for retailers to offer identical product lines. We provide a detailed analysis of the link between upstream market power and product line differentiation.