Product proliferation to prevent entry: a pedagogical note

In Cabral's (2000) industrial organization textbook, a simple model of strategic product proliferation is sketched out, in which an established firm – which would offer a homogeneous product, absent the threat of entry – laun ches two product varieties in order to deter entry, provided the fixed component of the cost function falls within a certain range. Among other simplifying assumptions, Cabral's model restricts the potential entrant to offering just one product variety. In this pedagogical note we allow for multiple varieties also on the part of the potential entrant and solve the two-stage location game for any level of the fixed cost. This analysis will permit a deeper understand ing of the relationship between the degree of scale economies and the intensity of product proliferation to deter entry.