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