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The effects of downstream entry in a vertical mixed oligopoly: the role of input pricing

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  • Jiaxin Han

    (Zhongnan University of Economics and Law)

  • Chenhang Zeng

    (Zhongnan University of Economics and Law)

Abstract

We study the effects of downstream entry in a vertical mixed oligopoly where a privatized upstream firm supplies a common input to asymmetric downstream firms via (i) uniform pricing and (ii) discriminatory pricing. We show that under price discrimination, downstream entry benefits consumers and most likely improves social welfare but hurts incumbent firms as commonly believed, regardless of the efficiency of entrants. However, under uniform pricing, if the upstream firm is highly nationalized, inefficient entry may reduce industry output (consumer surplus) and social welfare when entrants are very inefficient. Further, the entry of inefficient firms may raise both the industry output and the profits of all incumbent firms when the upstream firm is highly privatized. Importantly, we also find that banning price discrimination reduces social welfare when the upstream firm is highly nationalized. The mechanism behind the above results is related to the pricing behavior of the upstream firm, which is affected by the degree of privatization. This mechanism has not been discovered in the literature. Hence, the competition authorities should pay attention to particular features of industries to design proper policies.

Suggested Citation

  • Jiaxin Han & Chenhang Zeng, 2023. "The effects of downstream entry in a vertical mixed oligopoly: the role of input pricing," Journal of Economics, Springer, vol. 140(1), pages 37-61, September.
    • Handle: RePEc:kap:jeczfn:v:140:y:2023:i:1:d:10.1007_s00712-023-00831-0
    DOI: 10.1007/s00712-023-00831-0
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    More about this item

    Keywords

    Downstream entry; Upstream privatization; Profit-raising; Consumers-hurting; Welfare;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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