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Social efficiency of entry in a vertically related industry revisited

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  • Cao, Hang
  • Wang, Leonard F.S.

Abstract

We revisit the social desirability of entry in a vertical structure by showing that, if the input supplier has market power, social desirability of entry of downstream producers depends on the asymmetric marginal costs among competing firms. Under constant returns to scale, entry in the final goods market can be socially insufficient when entrants are inefficient, but it can be socially excessive if the cost of entrants is sufficiently low compared to the incumbents.

Suggested Citation

  • Cao, Hang & Wang, Leonard F.S., 2020. "Social efficiency of entry in a vertically related industry revisited," Economics Letters, Elsevier, vol. 192(C).
    • Handle: RePEc:eee:ecolet:v:192:y:2020:i:c:s0165176520301488
    DOI: 10.1016/j.econlet.2020.109200
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    References listed on IDEAS

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    1. Arijit Mukherjee & Soma Mukherjee, 2008. "Excess‐Entry Theorem: The Implications Of Licensing," Manchester School, University of Manchester, vol. 76(6), pages 675-689, December.
    2. Kotaro Suzumura & Kazuharu Kiyono, 1987. "Entry Barriers and Economic Welfare," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(1), pages 157-167.
    3. Ghosh, Arghya & Morita, Hodaka, 2007. "Social desirability of free entry: A bilateral oligopoly analysis," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 925-934, October.
    4. Arijit Mukherjee, 2012. "Social Efficiency of Entry with Market Leaders," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 431-444, June.
    5. Angela C. Chao & Jen-yao Lee & Leonard F.S. Wang, 2017. "Stackelberg Competition, Innovation and Social Efficiency of Entry," Manchester School, University of Manchester, vol. 85(1), pages 1-12, January.
    6. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
    7. Kotaro Suzumura, 2012. "Excess Entry Theorems After 25 Years," The Japanese Economic Review, Japanese Economic Association, vol. 63(2), pages 152-170, June.
    8. Arghya Ghosh & Hodaka Morita, 2007. "Free entry and social efficiency under vertical oligopoly," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 541-554, June.
    9. Arijit Mukherjee, 2010. "External Economies of Scale and Insufficient Entry," Journal of Industry, Competition and Trade, Springer, vol. 10(3), pages 365-371, September.
    10. Basak, Debasmita & Mukherjee, Arijit, 2016. "Social efficiency of entry in a vertically related industry," Economics Letters, Elsevier, vol. 139(C), pages 8-10.
    11. Arghya Ghosh & Souresh Saha, 2007. "Excess Entry in the Absence of Scale Economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(3), pages 575-586, March.
    12. Shoji Haruna & Rajeev Goel, 2011. "R&D, free entry, and social inefficiency," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 20(1), pages 89-101.
    13. DeGraba, Patrick, 1990. "Input Market Price Discrimination and the Choice of Technology," American Economic Review, American Economic Association, vol. 80(5), pages 1246-1253, December.
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    Cited by:

    1. Jia, Zhijie & Wen, Shiyan & Lin, Boqiang, 2024. "Would behaviors of state-owned enterprises impact the performance of downstream industries in China?," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 1007-1035.
    2. Debasmita Basak & Emmanuel Petrakis, 2021. "Social efficiency of entry: Implications of network externalities," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(4), pages 820-829, November.
    3. Mukherjee, Arijit & Zeng, Chenhang, 2022. "Social desirability of entry in a bilateral oligopoly—The implications of (non) sunk costs," Mathematical Social Sciences, Elsevier, vol. 118(C), pages 12-19.
    4. Basak Debasmita & Mukherjee Arijit, 2022. "Social Efficiency of Market Entry Under Tax Policy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 22(3), pages 601-610, July.

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    More about this item

    Keywords

    Vertical structure; Excess entry; Insufficient entry; Cost asymmetry;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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