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The welfare effects of entry: the role of the input market

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  • Arijit Mukherjee
  • Udo Broll
  • Soma Mukherjee

Abstract

In a successive Cournot oligopoly, we show the welfare effects of entry in the final goods market with no scale economies but with cost difference between the firms. If the input market is very concentrated, entry in the final goods market always increases welfare. If the input market is moderately concentrated, entry in the final goods market reduces welfare if the entrant is moderately cost inefficient than the incumbents. If the input market is highly competitive, entry in the final goods market reduces welfare if the entrant is very much cost inefficient than the incumbents. Hence, entry in the final goods market is more desirable under a concentrated input market. It follows from our analysis that entry increases the profits of the incumbent final goods producers if their marginal costs are sufficiently lower than the entrant’s marginal cost.

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Bibliographic Info

Paper provided by University of Nottingham, School of Economics in its series Discussion Papers with number 08/12.

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Handle: RePEc:not:notecp:08/12

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Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
Phone: (44) 0115 951 5620
Fax: (0115) 951 4159
Web page: http://www.nottingham.ac.uk/economics/
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Keywords: Entry; Profit; Vertical structure; Welfare;

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References

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  1. Arijit Mukherjee, 2007. "Note on a generalized wage rigidity result," Economics Bulletin, AccessEcon, vol. 10(12), pages 1-9.
  2. Klemperer, Paul D, 1988. "Welfare Effects of Entry into Markets with Switching Costs," Journal of Industrial Economics, Wiley Blackwell, vol. 37(2), pages 159-65, December.
  3. Okuno-Fujiwara, Masahiro & Suzumura, Kotaro, 1993. "Symmetric Cournot Oligopoly and Economic Welfare: A Synthesis," Economic Theory, Springer, vol. 3(1), pages 43-59, January.
  4. Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
  5. Anderson, Simon P & de Palma, Andre & Nesterov, Yurii, 1995. "Oligopolistic Competition and the Optimal Provision of Products," Econometrica, Econometric Society, vol. 63(6), pages 1281-1301, November.
  6. Arijit Mukherjee, . "Excessive entry in a bilateral oligopoly," Discussion Papers 08/02, University of Nottingham, School of Economics.
  7. C.C. von Weizsaker, 1980. "A Welfare Analysis of Barriers to Entry," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 399-420, Autumn.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  9. Bertrand Crettez & Marie-Cécile Fagart, 2005. "Does Entry Improve Welfare ? A General Equilibrium Approach of Competition Policy," Working Papers 2005-08, Centre de Recherche en Economie et Statistique.
  10. Suzumura, Kotaro & Kiyono, Kazuharu, 1987. "Entry Barriers and Economic Welfare," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 157-67, January.
  11. Abiru, Masahiro & Nahata, Babu & Raychaudhuri, Subhashis & Waterson, Michael, 1998. "Equilibrium structures in vertical oligopoly," Journal of Economic Behavior & Organization, Elsevier, vol. 37(4), pages 463-480, December.
  12. Arghya Ghosh & Souresh Saha, 2007. "Excess Entry in the Absence of Scale Economies," Economic Theory, Springer, vol. 30(3), pages 575-586, March.
  13. Perry, Martin K, 1984. "Scale Economies, Imperfect Competition, and Public Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 32(3), pages 313-33, March.
  14. Joshua S. Gans, 2007. "Concentration-Based Merger Tests and Vertical Market Structure," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 661-681.
  15. repec:ebl:ecbull:v:10:y:2007:i:12:p:1-9 is not listed on IDEAS
  16. Greenhut, M L & Ohta, H, 1976. "Related Market Conditions and Interindustrial Mergers," American Economic Review, American Economic Association, vol. 66(3), pages 267-77, June.
  17. Matsushima, Noriaki, 2006. "Industry profits and free entry in input markets," Economics Letters, Elsevier, vol. 93(3), pages 329-336, December.
  18. Dhillon, Amrita & Petrakis, Emmanuel, 2002. "A generalised wage rigidity result," International Journal of Industrial Organization, Elsevier, vol. 20(3), pages 285-311, March.
  19. Naylor, Robin, 2002. "The Effects Of Entry In Bilateral Oligopoly," The Warwick Economics Research Paper Series (TWERPS) 638, University of Warwick, Department of Economics.
  20. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
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  22. Ishikawa, Jota & Spencer, Barbara J., 1999. "Rent-shifting export subsidies with an imported intermediate product," Journal of International Economics, Elsevier, vol. 48(2), pages 199-232, August.
  23. Arijit Mukherjee & Soma Mukherjee, 2008. "Excess-Entry Theorem: The Implications Of Licensing," Manchester School, University of Manchester, vol. 76(6), pages 675-689, December.
  24. Ghosh, Arghya & Morita, Hodaka, 2007. "Social desirability of free entry: A bilateral oligopoly analysis," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 925-934, October.
  25. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  26. repec:ebl:ecbull:v:12:y:2007:i:33:p:1-6 is not listed on IDEAS
  27. Arghya Ghosh & Hodaka Morita, 2007. "Free entry and social efficiency under vertical oligopoly," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 541-554, 06.
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Cited by:
  1. Junichiro Ishida & Toshihiro Matsumura & Noriaki Matsushima, 2011. "Market Competition, R&D And Firm Profits In Asymmetric Oligopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 59(3), pages 484-505, 09.
  2. Fanti, Luciano & Meccheri, Nicola, 2014. "Profits and competition under alternative technologies in a unionized duopoly with product differentiation," Research in Economics, Elsevier, vol. 68(2), pages 157-168.
  3. 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.
  4. 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.

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