On the Effects of Downstream Entry

Management Science, January 1999

Rajeev K. Tyagi

Abstract

This paper examines the effects of entry in a downstream market where firms buy an input from an upstream supplier and sell their output to consumers. It shows demand conditions where, contrary to conventional wisdom, entry of a new downstream firm lowers the downstream-market output and increases the consumer price. Thus consumers may be better off with fewer sellers in such markets. The paper also shows that this entry may cause the profit of each incumbent downstream firm to remain unchanged, decrease, or even increase. Also, for a class of widely used demand conditions, the supplier’s optimal price is shown invariant to the entry/exit of its downstream buyer firms. The paper concludes with a classification of all possible effects of downstream entry in terms of fundamental market demand conditions.

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