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Hidden costs of entry regulation in vertical oligopolies and the crowding-out effect on entrepreneurs

Author

Listed:
  • Ge, Jing
  • Liu, Ruiming
  • Zhou, Boyang

Abstract

This study develops a successive vertical oligopoly model that incorporates scarce entrepreneurial talent to analyze entry regulation's effectiveness. Notably, the upstream sector's inherent market power in a laissez-faire economy leads to relative excess entry—a state in which talent is overallocated to the upstream sector relative to its social marginal contribution. While upstream entry regulation can restrict the number of firms to mitigate this imbalance, the resulting monopoly rents act as a “talent magnet,” drawing agents into nonproductive queuing and crowds out downstream entrepreneurship. Therefore, entry regulation does not necessarily enhance social welfare and may instead trigger a government failure that outweighs the market failure it seeks to correct. Moreover, downstream entry regulation is consistently less effective than its upstream counterpart. These results imply that policymakers should evaluate entry regulation not only by its direct effects on firm numbers in the targeted sector, but also by its hidden effects on the allocation of entrepreneurial talent across related sectors.

Suggested Citation

  • Ge, Jing & Liu, Ruiming & Zhou, Boyang, 2026. "Hidden costs of entry regulation in vertical oligopolies and the crowding-out effect on entrepreneurs," Economic Modelling, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:ecmode:v:162:y:2026:i:c:s0264999326002063
    DOI: 10.1016/j.econmod.2026.107677
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    Keywords

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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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