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Free Entry and Social Efficiency under Vertical Oligopoly

Arghya Ghosh and Hodaka Morita
The RAND Journal of Economics
Vol. 38, No. 2 (Summer, 2007), pp. 541-554
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/25046321
Page Count: 14
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Free Entry and Social Efficiency under Vertical Oligopoly
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Abstract

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 previous findings that, under Cournot oligopoly 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 are taken into account.

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