Entry Deterence through Strategic Sourcing

36 Pages Posted: 4 Dec 2006  

Yutian Chen

SUNY Stony Brook - Department of Economics

Date Written: November 2006

Abstract

We demonstrate that a downstream firm (an incumbent) may source to an upstream firm (a potential entrant) for the sole purpose of entry deterrence. The reason is that, on the one hand, as a supplier, the potential entrant would have a second mover's disadvantage upon its entry into the downstream market. On the other hand, on the basis of the sourcing transaction, the surplus generated by the more concentrated downstream market is shared between the incumbent and the entrant, leaving each one better off. Under many circumstances, sourcing due to entry-deterrence improves the social welfare. For some ranges of parameters, it even benefits consumers.

Keywords: Sourcing, Entry deterrence, Cournot Competition, Bertrand Competition

JEL Classification: D41, L11, L13

Suggested Citation

Chen, Yutian, Entry Deterence through Strategic Sourcing (November 2006). Available at SSRN: https://ssrn.com/abstract=948578 or http://dx.doi.org/10.2139/ssrn.948578

Yutian Chen (Contact Author)

SUNY Stony Brook - Department of Economics ( email )

NY 11733-4384
United States

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