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On the Effects of Downstream Entry

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  • Rajeev K. Tyagi

    (Graduate School of Management, University of California, Irvine, California 92697)

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    Abstract

    We study the effects of entry in a downstream market where firms (e.g., Compaq and IBM; CVS and Safeway) buy an input (e.g., microprocessor, grocery items) from an upstream supplier (e.g., Intel, Procter & Gamble) and sell their output to consumers. We show demand conditions where, contrary to conventional wisdom, entry of a new downstream firm lowers the downstream-market output and increases the consumer price. Thus consumers may be better off with fewer sellers in such markets. We also show that this entry may cause the profit of each incumbent downstream firm to: (i) remain unchanged; (ii) decrease; or (iii) even increase. Also, for a class of widely used demand conditions, the supplier's optimal price is shown invariant to the entry/exit of its downstream buyer firms. We classify all possible effects of downstream entry in terms of fundamental market demand conditions.

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    File URL: http://dx.doi.org/10.1287/mnsc.45.1.59
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 1 (January)
    Pages: 59-73

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:1:p:59-73

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    Related research

    Keywords: entry; vertical relationship; comparative-statics; oligopoly theory;

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    Cited by:
    1. Naylor, Robin & Soegaard, Christian, 2014. "The Effects of Entry in Oligopoly with Bargained Wages," The Warwick Economics Research Paper Series (TWERPS) 1044, University of Warwick, Department of Economics.
    2. Pinopoulos, Ioannis N., 2011. "Input pricing by an upstream monopolist into imperfectly competitive downstream markets," Research in Economics, Elsevier, vol. 65(3), pages 144-151, September.
    3. Beladi, Hamid & Mukherjee, Arijit, 2012. "Market structure and strategic bi-sourcing," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 210-219.
    4. Özelkan, Ertunga C. & ÇakanyIldIrIm, Metin, 2009. "Reverse bullwhip effect in pricing," European Journal of Operational Research, Elsevier, vol. 192(1), pages 302-312, January.
    5. Arijit Mukherjee, 2007. "Note on a generalized wage rigidity result," Economics Bulletin, AccessEcon, vol. 10(12), pages 1-9.
    6. Arya, Anil & Mittendorf, Brian, 2013. "Discretionary disclosure in the presence of dual distribution channels," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 168-182.
    7. Nathan Berg & Chun-Yu Chen & Barry J. Seldon, 2014. "Strategic Transfer Pricing and Intensity of Competition," Working Papers 1403, University of Otago, Department of Economics, revised Mar 2014.
    8. Matsushima, Noriaki & Mizuno, Tomomichi, 2012. "Profit-enhancing competitive pressure in vertically related industries," Journal of the Japanese and International Economies, Elsevier, vol. 26(1), pages 142-152.

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