Abstract: In an extended Hotelling model, an analysis is conducted on how firms selling goods make vertical line extension decisions when they take social preferences into account. The product line vertical extension strategy in the case of social preference or no social preference with a threat of entry is considered. It is found that, when the firm does not have social preference, the downward extension of the product line will have an extrusion effect. When a firm has a social preference, with the quality of the base product is high, and the downward extension of the product line will attract competitors to enter the market. With social preference, the optimal extension strategy of the firm's extended product line is related to the quality of the base product.

Key words: product line, vertical line extension, social preference, Hotelling model