Working Paper: CEPR ID: DP6730
Authors: Markus Reisinger; Monika Schnitzer
Abstract: This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall profitability of the two-tier structure while the upstream conditions mainly affect the distribution of profits. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and show when they are welfare enhancing.
Keywords: deregulation; free entry; price competition; product differentiation; successive oligopolies; two-part tariffs; vertical restraints
JEL Codes: D43; L13; L40; L50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| more competitive upstream markets (L13) | lower upstream prices (L11) |
| lower upstream prices (L11) | increased market entry (D40) |
| increased market entry (D40) | lower prices downstream (L11) |
| increased downstream competition (L11) | upstream profits (D33) |
| increased downstream competition (L11) | downward pressure on prices (D41) |
| few downstream firms present (L19) | positive effect on upstream profits (F61) |
| many downstream firms present (L19) | negative effect on upstream profits (F69) |
| competitive conditions in downstream market (L11) | profitability of overall structure (L21) |
| upstream conditions (L95) | profit distribution (D33) |
| deregulation policies (L51) | feedback effects between upstream and downstream markets (D53) |
| few firms in both markets (L19) | downstream deregulation more effective (L51) |
| many firms present (L20) | upstream deregulation preferable (L51) |
| welfare implications of vertical restraints (L42) | differences in welfare effects (D69) |