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A vertical oligopoly in which entry increases every firm's profit

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  • Tatsuhiko Nariu
  • David Flath
  • Makoto Okamura

Abstract

We develop a model in which each of m manufacturers forms a differentiated final product by assembling n components that are provided by its own n independent suppliers. Each supplier produces a unique component and sells to only one of the manufacturers. The manufacturers engage in product‐differentiated Cournot competition. We show that if initially the number of manufacturers is sufficiently small, and if the number of components is large enough, then, as the number of manufacturers increases, every firm—including downstream manufacturers and their upstream component suppliers—earns more profit. Entry can increase every firm's profit. The package‐tour industry of Japan is an example of such an industry. Drip coffee supplied by competing convenience stores in Japan is another.

Suggested Citation

  • Tatsuhiko Nariu & David Flath & Makoto Okamura, 2021. "A vertical oligopoly in which entry increases every firm's profit," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(3), pages 684-694, August.
    • Handle: RePEc:bla:jemstr:v:30:y:2021:i:3:p:684-694
    DOI: 10.1111/jems.12426
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    References listed on IDEAS

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    1. Arijit Mukherjee & Laixun Zhao, 2017. "Profit Raising Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 65(1), pages 214-219, March.
    2. Matsushima, Noriaki & Mizuno, Tomomichi, 2013. "Vertical separation as a defense against strong suppliers," European Journal of Operational Research, Elsevier, vol. 228(1), pages 208-216.
    3. Didier Laussel, 2008. "Buying Back Subcontractors: The Strategic Limits of Backward Integration," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(4), pages 895-911, December.
    4. Ramon Casadesus-Masanell & Barry Nalebuff & David B. Yoffie, 2007. "Competing Complements," Working Papers 07-44, NET Institute, revised Nov 2007.
    5. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    6. Fanti, Luciano, 2013. "Cross-ownership and unions in a Cournot duopoly: When profits reduce with horizontal product differentiation," Japan and the World Economy, Elsevier, vol. 27(C), pages 34-40.
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    Cited by:

    1. 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.
    2. Tsuritani, Ryosuke, 2023. "Strategic Input Price Discrimination with Horizontal Shareholding," MPRA Paper 121176, University Library of Munich, Germany.
    3. Duarte Brito & Margarida Catalão-Lopes, 2023. "Profit raising entry under mixed behavior," Journal of Economics, Springer, vol. 138(1), pages 51-72, January.

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