Multi-product Firms and Product Variety

We examine the role of multi-product firms in the provision of product variety using the ChenRiordan spokes model. In the presence of economies of scope, the equilibrium includes a small number of multi-product firms that use their product range strategically in order to affect rivals' prices. We show that under some conditions, firms drastically restrict their product range in order to relax price competition, causing a substantial underprovision of variety. However, in general, product variety under multi-product firms may be higher or lower with respect to both the first best and the equilibrium with single-product firms.