Downstream Entry Research Articles

Entry accommodation strategies in a shipping supply chain with corporate social responsibility

Carriers often enter new shipping markets and undertake corporate social responsibility (CSR) activities to attract more shippers. CSR generally refers to the integration of social and environmental factors by a firm into its business decision-making. This paper constructs a shipping supply chain composed of one port, one carrier, and one potential entrant carrier, where both carriers are committed to CSR activities. Two possible channel structures of the incumbent supply chain are considered: centralization and decentralization. Under both structure settings, we study the entry strategy of the entrant, accommodation strategy of the port, and impacts of entry on consumer surplus and social welfare. Our results show that (i) the entry and accommodation strategies depend on the CSR levels of carriers; (ii) downstream entry improves social welfare under centralization but may decrease it under decentralization; (iii) the entrant has more incentive to enter under decentralization than under centralization when the incumbent carrier has a high CSR level. However, the port might have less incentive to accommodate entry under decentralization; (iv) channel decentralization may improve consumer surplus and social welfare when the port accommodates the entry, while hurts these when the port deters the entry. Additionally, we find that under the case of endogenous CSR level, the entry and accommodation strategies depend on the CSR investment cost coefficient; and the entrant has a stronger entering incentive under uniform pricing than under differentiated pricing if the incumbent carrier has a low CSR level.

Vertical Contracts and Downstream Entry*

We study the implications of different contractual forms in a market with an incumbent upstream monopolist and free downstream entry. We show that traditional conclusions regarding the desirability of linear contracts radically change when entry in the downstream market is endogenous rather than exogenous. By triggering more entry than two‐part tariffs, wholesale price contracts can generate higher aggregate output, consumer surplus, and welfare. In light of this, the upstream monopolist may prefer to trade with wholesale price contracts as well as to give up part of its bargaining power when it is high.

The effects of downstream entry in a vertical mixed oligopoly: the role of input pricing

The effects of downstream entry in a vertical mixed oligopoly: the role of input pricing

The interactions between upstream quality disclosure and downstream entry

Currently, an increasing number of online platforms are entering retail markets, sharing a common manufacturer with traditional retailers. This study focuses on the platform entry strategy in a supply chain, where a manufacturer that could voluntarily disclose quality information sells its product via a retailer. Two common distribution contracts (reselling and agency selling) between the manufacturer and the online platform are considered. We find that downstream entry induces the manufacturer to reveal more quality information to the consumer than in the monopoly setting and that the agency contract results in a higher (lower) transparency level of the supply chain than the reselling contract when the commission fee is small (large). Moreover, contrary to the conventional wisdom that downstream entry likely harms incumbent retailers, we show that entry is not necessarily a problem that harms existing traditional retailers due to the increased quality transparency caused by entry. It is generally believed that a higher commission fee may encourage the platform to adopt the agency contract. In contrast, we demonstrate that the platform does not always benefit from a higher commission fee when an agency selling contract is adopted; the platform still chooses a reselling contract to enter the market in a context with asymmetric quality information, despite the higher commission fee. That is, the manufacturer’s quality disclosure can create a new win-win outcome for the platform and manufacturer in the choice of distribution contract.

Vertical Price Restraints and Free Entry Under Asymmetric Information*

In a vertically related market where the number of manufacturer‐retailer hierarchies is endogenously determined by free entry, we investigate the impact of vertical price restraints on the free‐entry equilibrium and its welfare properties under asymmetric information within each supply hierarchy. We compare the legal regimes of laissez‐faire and ban on resale price maintenance (RPM) under different entry decision modes. Under upstream entry, laissez‐faire generates higher entry and increases consumer surplus, but a ban on RPM enhances total welfare. Socially excessive entry occurs under both legal regimes, and the entry bias declines with the severity of the asymmetric information problem. Conversely, under downstream entry, a ban on RPM stimulates entry and consumer surplus, but laissez‐faire can be total welfare superior. Our results provide antitrust policy implications about vertical price control.

Downstream entry revisited: Economic effects of entry in vertically-related markets

The earlier studies on the effects of entry in a downstream market where vertically-related and symmetric retailers resell a product purchased from an upstream manufacturer propose that if the downstream market is monopolized by the incumbent retailer and/or the (inverse) consumer demand function is linear, then the equilibrium wholesale price charged by the upstream manufacturer is invariant to the entry of his new downstream retailers. Consequently, in accordance with the conventional economic wisdom, entry raises the downstream-market quantity, lowers the consumer price therein and reduces the incumbent retailer’s profits. We disclose that all those effects of downstream entry under restrictive market conditions are reversed with the presence of a vertically-related retailer who serves a separate (and asymmetric) market in the distribution channel. Contingent on the degree of asymmetry on demand potential between two markets and the extent of product substitutability, downstream entry may: (1) have a positive/negative spillover effect on the upstream manufacturer’s equilibrium wholesale price; (2) raise both the downstream-market quantity and consumer price; and/or (3) increase the incumbent retailer’s profit. All those and other effects of entry in downstream markets adduced in extant literature vary with demand- and competition-related factors across downstream markets in a distribution channel.

Upstream Competition with Complex and Unobservable Contracts

This paper examines situations where two vertically integrated firms consider supplying an input to an independent downstream competitor via privately observed contracts. We identify equilibria where competition in the upstream market emerges—the downstream competitor gets supplied—as well as when the downstream firm does not receive the input and is excluded from the market. The likelihood of the outcome in which the downstream firm does not get supplied depends not only on demand parameters, but also on contractual flexibility and observability. We show that when contracts are unobservable, downstream entry will occur less often. Furthermore, our results suggest that permitting contracts that enable the contracting parties to coordinate their behavior in the downstream market may improve welfare by increasing the likelihood that the downstream firm is supplied.

Vertical Contracts and Entry

We study the implications of different contractual forms in a market with an incumbent upstream monopolist and free downstream entry. We show that traditional conclusions regarding the desirability of linear contracts radically change when entry in the downstream market is endogenous rather than exogenous. By triggering more entry than two-part tariffs, wholesale price contracts can generate higher aggregate output, consumer surplus, and welfare. In light of this, the upstream monopolist may prefer to trade with wholesale price contracts as well as to give up part of its bargaining power when it is high.

Tax or subsidy? An analysis of environmental policies in supply chains with retail competition

This paper investigates the impact of two environmental policies: emissions abatement subsidy and emissions tax, on a three-tier supply chain where the manufacturer distributes through competitive retailers and invests in emissions abatement manufacturing technology. The government pursues social welfare maximization, while the manufacturer and retailers are profit driven. We find that the subsidy policy offers the manufacturer greater incentives to abate pollution and yields higher profits for channel members; however, when emissions abatement is very costly and production emissions are highly damaging, the tax policy should be implemented, as the subsidy policy leads to lower social welfare and environmental performance. Interestingly, we show that the manufacturer has no incentive to improve emissions abatement efficiency if the environmental damage of its production is high under the subsidy policy or low under the tax policy. The manufacturer always welcomes more downstream entry under the subsidy policy but not necessarily under the tax policy; each retailer always fares worse with more competition. More competition enhances social welfare under the tax policy but not necessarily under the subsidy policy. Furthermore, caution should be exercised when adopting the subsidy policy, because a “hazard zone” exists where society suffers but does not under the tax policy.

Effects of downstream entry in a supply chain with a spot market

This article contributes to research at the interface of marketing, operations, and risk management by investigating the effects of downstream entry in a two-echelon supply chain with risk-averse supply chain members and a liquid spot market for trading intermediate goods. We find that at downstream entry, the upstream supplier may decrease the contract price of the intermediate goods to balance its risk-free utility from the contract channel and its risky utility from the spot market; correspondingly, downstream manufacturers may increase their contract quantities. As a result, downstream entry may hurt the supplier and benefit the incumbent manufacturers. We also identify situations where downstream entry can lead to a “win-win-win” situation, where the supplier, incumbent manufacturers, and final product consumers all benefit from downstream entry. Furthermore, when spot price volatility is high, the supplier may engage in speculative trading, but downstream entry discourages this speculative behavior. We conclude that these results are driven by the combined effects of spot trading and the risk attitudes of supply chain members. Specifically, the effects of downstream entry are dramatically affected by the risk attitude of manufacturers, but only slightly affected by that of the supplier. Finally, we find that the main results hold when the supplier’s capacity level is endogenous.

Vertical foreclosure and multi-segment competition

This paper analyzes a supplier’s incentives to foreclose downstream entry when entrants have stronger positions in different market segments, thus bringing added value as well as competition. We first consider the case where wholesale contracts take the form of linear tariffs, and characterize the conditions under which the competition-intensifying effect dominates, thereby leading to foreclosure. We then show that foreclosure can still occur with non-linear tariffs, even coupled with additional provisions such as resale price maintenance.

Specializing in Generality: Firm Strategies When Intermediate Markets Work

This paper studies the relationship between two decisions shaping the organizational configuration of a firm: whether to make the upstream resources more general and deployable to more markets (versus keeping them tailored to a few markets) and whether to trade with downstream firms as an upstream supplier of intermediate products and services (versus directly entering downstream markets). Although the literature has looked at these two decisions separately, we argue that they depend on each other. This has the important implication that they can generate organizational complementarities, inducing firms to implement them jointly. We are motivated in particular by the observation that an increasing number of firms invest in general upstream resources and exploit them as upstream suppliers of intermediate services or products—a strategy that we refer to as specialization in generality. Interestingly, prior literature has mostly highlighted the use of general upstream resources to enter new downstream markets. We identify the supply and demand conditions under which specialization in generality is instead more likely to emerge: lack of prior downstream assets on the supply side and a roughly equal distribution of buyers across intermediate markets (a “broad” demand) on the demand side. We test our predictions using a sample of firms in the U.S. laser industry between 1993 and 2001. A regulatory shock that increases the value of trading relative to downstream entry provides the setting for a quasi-natural experiment, which corroborates our theoretical predictions.

Vertical separation vs. independent downstream entry in an electricity network: Experimental insights

We analyze a realistic simulation of a complex electricity network. We obtain the data with a series of experimental sessions designed to closely replicate the Spanish electricity market. In the experiments reported here we compare the status quo with two alternative regulatory market structures. In one of them, labeled as vertical separation, we impose that power generating firms and electricity distributors operate as independent business groups. In the second, we study the effect of entry by independent end-suppliers. Both alternative scenarios dominate the status quo in terms of market efficiency, but the latter of them dominates the former.

Specializing in Generality as a Strategy in Markets for Technology

This paper investigates the case in which suppliers of upstream technologies are induced to consider strategies that are alternative to downstream entry following an increase in the costs of downst...

Competition in multi-echelon distributive supply chains with linear demand

We studied competition in multi-echelon supply chains with a distributive structure. Firms in the supply chain are grouped into homogeneous sectors that contain identical firms with identical production capabilities that all produce exactly one undifferentiated product. Each sector may distribute its product to several different downstream sectors, and each sector is only supplied by a single upstream sector. The demand curves in final markets are assumed to be linear, as are the variable costs of production in all sectors. Competition is modelled via the successive Cournot model in which firms choose production quantities for their downstream market so as to maximise their own profits, given prices for the input. Under these assumptions, equilibrium prices, quantities and firm-level profits for any multi-echelon distributive network can be derived. We discuss the network transformation properties, and using these properties, we examine the effect of demand parameter changes and cost changes on any firm’s equilibrium price, quantity and profit. We also explore the effects of entry on the equilibrium solution. While the effects of upstream entry on downstream sectors are as expected, the effect of downstream entry on upstream sectors, and therefore on sectors in parallel (lateral) paths, can be quite counter-intuitive.

Heads you Win Tails I lose: The Influence of Patent Strength on Downstream Entry

With a few exceptions, empirical work on how institutions influence entry is sparse. This paper studies how stronger patents influence entry into downstream product markets. We build on the prior l...

Profit-raising Entry in Vertically Related Markets

We extend the standard vertical oligopoly model to allow for free entry in the upstream sector, and research and development with knowledge spillover in the downstream sector. The fact that an increase in the number of firms lowers industry profit is the common wisdom that may not hold in vertical structure of production. We provide a complementary reasoning and find that aggregate downstream profit can increase with downstream entry when the knowledge spillover effect and the entry cost are moderate. Copyright © 2014 John Wiley & Sons, Ltd.

Price Discrimination in Input Markets: Downstream Entry and Efficiency

The extant theory on price discrimination in input markets takes the structure of the downstream industry as exogenously given. This paper endogenizes the structure of the downstream industry and examines the effects of permitting third‐degree price discrimination on market structure and welfare. We identify situations where permitting price discrimination leads to either higher or lower wholesale prices for all downstream firms. These findings are driven by upstream profits being discontinuous due to costly entry. Moreover, permitting price discrimination fosters entry which often improves welfare. Nevertheless, entry can also reduce welfare because it may lead to a severe inefficiency in production.

Vertical Separation v. Independent Downstream Entry in the Spanish Electricity Network: An Experimental Approach

We present experimental results from a series of sessions organized using the Power Market simulator; a software designed to realistically replicate the Spanish Electricity Market. In the experiments reported here we compare the status quo to two alternative treatments which represent alternative market structures. In one of them, labeled as vertical separation, we assume that power generating firms and electricity distributors-endsuppliers belong to separate business groups. In the second, we study the effect of entry by independent end-suppliers. Both alternative scenarios dominate the status quo in terms of market efficiency, whereas the latter of them dominates the former.

A note on the effects of downstream efficiency on upstream pricing

The study of the effects of downstream entry on upstream pricing has revealed the counter-intuitive result of the supplier’s pricing policy being invariant to a new downstream entry under an isoelastic inverse demand function. We show that this counter-intuitive result is reversed when a new downstream entry affects downstream efficiency. We show that in the presence of increased post-entry downstream efficiency the supplier increases the wholesale price by taking advantage of the increased retail efficiency and competition. We also investigate the applicability of our results under other types of inverse demand functions.