Supplier Encroachment with Complementary Inputs

Abstract

We examine the incentives and implications of supplier encroachment, when production of the final product requires multiple complementary inputs and each firm is specialized in the production of one input. Entry of a supplier into the final product market gives rise to cross-supply of inputs. We show, contrary to conventional views, that encroachment can increase wholesale prices and can reduce consumer surplus. We also show that encroachment can be beneficial both for the entrant and the incumbent, even when they are equally efficient and move simultaneously in the final product market and there are no prior investments in sales effort or cost reduction. The model yields novel managerial, empirical and policy implications.