Social efficiency of entry in a vertically related industry revisited

Abstract

We revisit the social desirability of entry in a vertical structure by showing that, if the input supplier has market power, social desirability of entry of downstream producers depends on the asymmetric marginal costs among competing firms. Under constant returns to scale, entry in the final goods market can be socially insufficient when entrants are inefficient, but it can be socially excessive if the cost of entrants is sufficiently low compared to the incumbents.