Free Entry and Social Efficiency Under Vertical Oligopoly

24 Pages Posted: 16 Dec 2004

See all articles by Arghya Ghosh

Arghya Ghosh

UNSW Australia Business School, School of Economics

Hodaka Morita

Hitotsubashi University - Institute of Economic Research

Date Written: November 16, 2005

Abstract

We offer a new perspective on social efficiency of free entry through analyzing a successive vertical oligopoly model that explicitly incorporates vertical relationships between industries. We demonstrate that free entry in an industry that produces a homogeneous product can lead to a socially insufficient, rather than excessive, number of firms. This is in contrast to the previous findings in the theoretical industrial organization literature, which found that, in homogeneous final-product markets with Cournot oligopoly and fixed set-up costs, level of entry in the free-entry equilibrium is always socially excessive. In our framework, this previous finding arises as a special case where the downstream or the upstream sector has no market power. It has often been argued that this standard result can provide a justification for apparently anticompetitive entry regulations. Our insufficient entry result indicates that such a justification is not necessarily valid, when vertical relationships are taken into account. This yields an important policy implication, given that entry regulations have often been imposed on industries that produce relatively homogeneous intermediate products.

Keywords: Entry regulation, excessive entry, free entry, insufficient entry, social efficiency, vertical oligopoly

JEL Classification: L13, L50

Suggested Citation

Ghosh, Arghya and Morita, Hodaka, Free Entry and Social Efficiency Under Vertical Oligopoly (November 16, 2005). Available at SSRN: https://ssrn.com/abstract=632941 or http://dx.doi.org/10.2139/ssrn.632941

Arghya Ghosh

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Hodaka Morita (Contact Author)

Hitotsubashi University - Institute of Economic Research ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8306
Japan

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