Product Differentiation, Exclusivity, and Multi-purchasing

This paper investigates the competition between two horizontally differentiated firms whose products have partially overlapping functionalities. If the firms make their products exclusive with each other, consumers can purchase only one product. Otherwise, consumers can buy both products and derive utility from the non-overlapping functionalities. We show that the firm with a quality advantage is more likely to provide nonexclusive products. Moreover, the equilibrium exclusivity level is overprovided from the socially optimal point of view. The lower the differentiation between products, the more likely the firms and the social welfare maximizer are to allow purchasing both products.