Excessive supplier pricing and high-quality foreclosure

This article shows that entry of a more input-efficient, but lower quality downstream producer, compared to a high-quality downstream incumbent, might be detrimental to social welfare. In particular, if the entrant is extremely efficient, a monopolist upstream supplier reacts by charging an excessive price, driving the high-quality incumbent out of the market and reducing social welfare. However, despite the entrant's low input requirement, the supplier's profit increases for all but the most efficient entrant technologies. Enabling the supplier to engage in third degree price discrimination may increase social welfare.