Strategic sourcing for entry deterrence and tacit collusion |
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Authors: | Yutian Chen |
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Institution: | (1) Faculty of Economics, University of Porto, Rua Dr. Roberto Frias, 4200-464 Porto, Portugal |
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Abstract: | By sourcing key intermediate goods to a potential entrant, an incumbent firm can credibly and observably commit to an intense
post-entry competition, thereby deterring the entry. At the same time, a collusive effect exists, whereby the entrant’s loss
from staying out of the final-good market is compensated through their sourcing transaction. We find that entry-deterring
sourcing in general has ambiguous effect on social welfare. However, there exist scenarios where it enhances not only social
welfare, but also consumers’ surplus. |
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Keywords: | |
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