Successive Oligopolies with Differentiated Firms and Endogeneous Entry

Authors


  • We thank the Editor, an anonymous referee, Gergely Csorba, Guido Friebel, Paul Heidhues, Felix Höffler, Hodaka Morita, Simon Loertscher, Salvatore Piccolo, Michael Raith, Ray Rees, Patrick Rey, Paul Seabright, Ingo Vogelsang and Lucy White for very helpful comments and suggestions. We also thank participants at the Universities of Berlin (Social Science Center), California (Berkeley and San Diego), Cologne, Mannheim, Melbourne, Munich and Toulouse. Both authors gratefully acknowledge financial support from the German Science Foundation through SFB/TR 15. Part of this paper has been written while the first author visited the IDEI in Toulouse which he thanks for the hospitality.

Abstract

We develop a model of successive oligopolies with endogenous entry, allowing for varying degrees of product differentiation and entry costs in both markets. We show that downstream conditions dominate the overall profitability of the two-tier structure while upstream conditions mainly affect the distribution of profits. We analyze how two-part tariffs and resale price maintenance shape the endogenous market structure and study their welfare effects. In contrast to previous literature, we find that welfare under linear prices can be larger than under twopart tariffs although the latter avoids double marginalization. This is because linear prices induce more downstream market entry.

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