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Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition by George Norman, Dan Richards, Lynne Pepall

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7

Product Variety and Quality Under Monopoly

Most firms sell more than one product. Microsoft offers not only an operating system and an Internet browser but also a number of other products, most notably, the word-processing package Word, the spreadsheet software Excel, and the presentation package PowerPoint. High-tech firms such as Apple sell a wide range of computers including a tablet computer, a music player, and a mobile telephone. Major automobile manufacturers such as Toyota offer a bewildering array of mid-range automobiles and a range of higher-end autos under other brand names, such as Lexus. Companies such as Comcast offer telephone, television, and Internet services. Fashion designers such as Ralph Lauren offer a broad range of apparel from sportswear to haute couture, for both women and men.

Indeed, even the most cursory examination of consumer markets suggests that the multiproduct firm is likely to be the norm rather than the exception. Take a company such as Kellogg's. Is there any flavor, color, or texture of breakfast cereal that they do not market? Or consider Procter & Gamble, a large consumer product company that offers more than a dozen varieties of their Head and Shoulders shampoo and even more varieties of their Crest toothpaste.

This leads us to the question of exactly how much variety a firm should aim to offer. Indeed Procter & Gamble asked itself the same question when it reexamined its product strategy in the early 1990s. By 1996, the company had reduced ...

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