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Input pricing by an upstream monopolist into imperfectly competitive downstream markets

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Abstract

In downstream markets where entry is independent from profitability conditions, the upstream supplier’s optimal pricing policy is invariant with respect to downstream market structure. This price invariant result, however, is reversed when there is free entry in downstream market. When entry is endogenously dependent on profitability conditions, the upstream supplier’s price-setting behavior depends on the number of operative firms in the final good market. We show that the upstream supplier charges a higher input price under a free entry situation in downstream market than under a no-entry condition. We also show that a higher input price is set under Bertrand competition than under Cournot competition in a downstream market with free entry.

Suggested Citation

  • Ioannis Pinopoulos, 2009. "Input pricing by an upstream monopolist into imperfectly competitive downstream markets," Discussion Paper Series 2009_14, Department of Economics, University of Macedonia, revised Oct 2009.
  • Handle: RePEc:mcd:mcddps:2009_14
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    File URL: http://aphrodite.uom.gr/econwp/pdf/dp1409.pdf
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    Keywords

    Vertical relationship; Pricing; Competition; Oligopoly; Free entry.;

    JEL classification:

    • 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
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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