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Free entry and social efficiency under vertical oligopoly
Author(s) -
Ghosh Arghya,
Morita Hodaka
Publication year - 2007
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2007.tb00083.x
Subject(s) - oligopoly , cournot competition , free entry , microeconomics , economics , homogeneous , set (abstract data type) , industrial organization , product (mathematics) , product differentiation , computer science , mathematics , geometry , combinatorics , programming language
We analyze a successive vertical oligopoly model that incorporates vertical relationships between industries and demonstrate that free entry in an industry that produces a homogeneous product can lead to a socially insufficient number of firms. This is in contrast with the proevious findings that, under Cournot oligopoloy with fixed set‐up costs, level of entry in the free‐entry equilibrium is socially excessive. It has often been argued that this result can provide a justification for apparently anticompetitive entry regulations. Our finding yields an important policy implication that such a justification is not necessarily valid when vertical relationships ar taken into account.