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Successive Oligopolies with Differentiated Firms and Endogeneous Entry

By  |  February 14, 2013

Posted by D. Daniel Sokol

Markus Reisinger, WHU – Otto Beisheim School of Management, CESifo (Center for Economic Studies and Ifo Institute for Economic Research) andv Monika Schnitzer, University of Munich – Department of Economics, Centre for Economic Policy Research (CEPR) describe Successive Oligopolies with Differentiated Firms and Endogeneous Entry

ABSTRACT: We develop a model of successive oligopolies with endogenous entry, allowing for varying degrees of product differentiation and entry costs in both markets. We show that downstream conditions dominate the overall profitability of the two‐tier structure while upstream conditions mainly affect the distribution of profits. We analyze how two‐part tariffs and resale price maintenance shape the endogenous market structure and study their welfare effects. In contrast to previous literature, we find that welfare under linear prices can be larger than under twopart tariffs although the latter avoids double marginalization. This is because linear prices induce more downstream market entry.