In vertical models of product differentiation, consumers agree on their ranking of product quality but differ in their willingness to pay for it. Vertical models can give rise to “natural oligopoly.” If consumers do not differ too much in their willingness to pay, a finite number of firms enter in equilibrium regardless of market size. I consider a simple vertical model in which willingness to pay differs enough so that the number of entering firms increases with market size. I derive analytical expressions for equilibrium prices, markups, and shares for any finite number of entering firms, and limiting expressions for market shares as the market size and the number of firms grow arbitrarily large. The market share of the largest firm converges from above to .58, the combined share of the four largest firms to .99, and the HHI to .44 (4,400). Quality competition can give rise to natural oligopoly—high concentration and persistent profits—even if the number of entering firms is unlimited.
JEL Codes: D21, D43, L11, L13, L25