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A note on the effects of downstream free entry on wholesale pricing

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Abstract

We consider a simple model where downstream firms (retailers) carry the product of an upstream supplier (manufacturer). Under very general demand conditions, we show that, when downstream entry is endogenously dependent on profitability conditions, the optimal wholesale price charged by the manufacturer is higher under competitive conditions than under monopolistic conditions in the downstream market. The well-known result of the upstream supplier’s pricing policy being invariant to downstream market structure is reversed when free entry in the downstream market is taken into account.

Suggested Citation

  • Ioannis N. Pinopoulos, 2014. "A note on the effects of downstream free entry on wholesale pricing," Discussion Paper Series 2014_05, Department of Economics, University of Macedonia, revised Sep 2014.
    • Handle: RePEc:mcd:mcddps:2014_05
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    References listed on IDEAS

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    1. Rajeev K. Tyagi, 1999. "On the Effects of Downstream Entry," Management Science, INFORMS, vol. 45(1), pages 59-73, January.
    2. Greenhut, M L & Ohta, H, 1976. "Related Market Conditions and Interindustrial Mergers," American Economic Review, American Economic Association, vol. 66(3), pages 267-277, June.
    3. Pinopoulos, Ioannis N., 2011. "Input pricing by an upstream monopolist into imperfectly competitive downstream markets," Research in Economics, Elsevier, vol. 65(3), pages 144-151, September.
    4. Seade, Jesus, 1980. "The stability of cournot revisited," Journal of Economic Theory, Elsevier, vol. 23(1), pages 15-27, August.
    5. Arijit Mukherjee & Udo Broll & Soma Mukherjee, 2009. "The welfare effects of entry: the role of the input market," Journal of Economics, Springer, vol. 98(3), pages 189-201, December.
    6. Smith, Howard & Thanassoulis, John, 2006. "Upstream Competition and Downstream Buyer Power," CEPR Discussion Papers 5803, C.E.P.R. Discussion Papers.
    7. Koulamas, Christos & Kyparisis, George J, 2010. "A note on the effects of downstream efficiency on upstream pricing," European Journal of Operational Research, Elsevier, vol. 200(3), pages 926-928, February.
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    More about this item

    Keywords

    Pricing; Supply chains; Equilibrium; Competition; Free entry.;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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