Buyer power with atomistic upstream entry: Can downstream consolidation increase production and welfare? |
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| Institution: | 1. Department of Economics, Yale University, 30 Hillhouse Ave., New Haven, CT 06511, USA;2. School of Economics, LeBow College of Business, Drexel University, 3220 Market Street, Philadelphia, PA 19104, USA;1. Department of Economics, University of Melbourne, Level 4, FBE Building, 111 Barry Street, Victoria 3010, Australia;2. Fuqua School of Business, Duke University, 100 Fuqua Drive, Durham, NC 27708, USA;1. Analysis Group Ltd., London, UK;2. European Commission, DG COMP, Madou 17/13, Saint-Josse-ten-Node B-1210, Belgium;1. University of Nottingham and CEP, University Park, Nottingham, NG7 2RD, United Kingdom;2. CEPR, United Kingdom;3. University of Mannheim, L7 3-5, 68131 Mannheim, Germany |
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| Abstract: | This paper investigates the effects of buyer power on entry into an atomistic upstream market and economic welfare. Under reasonable market conditions, we show that industries with a few buyers induce more upstream entry than industries with a larger number of firms. In particular, monopsony can be more conducive to entry and lead to higher social welfare than more fragmented industry structures. This seeming paradox arises because a single buyer better internalizes the positive effects of entry on later-periods’ supply conditions than a collection of firms. This result is relevant in a number of market settings, including markets for specialized labor and processing markets for agricultural products. |
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