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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)

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.

Suggested Citation

  • Rajeev K. Tyagi, 1999. "On the Effects of Downstream Entry," Management Science, INFORMS, vol. 45(1), pages 59-73, January.
  • Handle: RePEc:inm:ormnsc:v:45:y:1999:i:1:p:59-73
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    File URL: http://dx.doi.org/10.1287/mnsc.45.1.59
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Naylor, Robin & Soegaard, Christian Author-workplace-Name University of Warwick, 2018. "The Effects of Entry in Oligopolistic Trade with Bargained Input Prices," The Warwick Economics Research Paper Series (TWERPS) 1148, University of Warwick, Department of Economics.
    2. 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.
    3. Kumoi, Yuki & Matsubayashi, Nobuo, 2014. "Vertical integration with endogenous contract leadership: Stability and fair profit allocation," European Journal of Operational Research, Elsevier, vol. 238(1), pages 221-232.
    4. repec:bla:jindec:v:65:y:2017:i:1:p:214-219 is not listed on IDEAS
    5. Beladi, Hamid & Mukherjee, Arijit, 2012. "Market structure and strategic bi-sourcing," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 210-219.
    6. Ioannis N. Pinopoulos, 2014. "A note on the effects of downstream free entry on wholesale pricing," Discussion Paper Series 2014_05, Department of Economics, University of Macedonia, revised Sep 2014.
    7. 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.
    8. Yamada, Mai, 2016. "The Optimal Trading Partner for an Upstream Monopolist," MPRA Paper 70325, University Library of Munich, Germany.
    9. Naylor, Robin A & 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.
    10. repec:bla:manchs:v:85:y:2017:i:4:p:430-449 is not listed on IDEAS
    11. Zhou, Yong-Wu & Cao, Zong-Hong & Zhong, Yuanguang, 2015. "Pricing and alliance selection for a dominant retailer with an upstream entry," European Journal of Operational Research, Elsevier, vol. 243(1), pages 211-223.
    12. Arijit Mukherjee, 2007. "Note on a generalized wage rigidity result," Economics Bulletin, AccessEcon, vol. 10(12), pages 1-9.
    13. Koulamas, Christos & Kyparisis, George J, 2010. "A note on the effects of downstream efficiency on upstream pricing," European Journal of Operational Research, Elsevier, vol. 200(3), pages 926-928, February.
    14. repec:ebl:ecbull:v:10:y:2007:i:12:p:1-9 is not listed on IDEAS
    15. Arijit Mukherjee & Laixun Zhao, 2017. "Profit Raising Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 65(1), pages 214-219, March.
    16. Altug, Mehmet Sekip, 2016. "Supply chain contracting for vertically differentiated products," International Journal of Production Economics, Elsevier, vol. 171(P1), pages 34-45.
    17. Glock, Christoph H. & Kim, Taebok, 2015. "The effect of forward integration on a single-vendor–multi-retailer supply chain under retailer competition," International Journal of Production Economics, Elsevier, vol. 164(C), pages 179-192.
    18. Özelkan, Ertunga C. & ÇakanyIldIrIm, Metin, 2009. "Reverse bullwhip effect in pricing," European Journal of Operational Research, Elsevier, vol. 192(1), pages 302-312, January.
    19. 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.
    20. 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.
    21. repec:otg:wpaper:1403 is not listed on IDEAS
    22. Arijit Mukherjee & Achintya Ray, 2014. "Entry, Profit and Welfare under Asymmetric R&D Costs," Manchester School, University of Manchester, vol. 82(3), pages 284-295, June.

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