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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

An Analysis on the Welfare Effect of Market Entry and Price Discrimination

Vol.18, No.1, March , 1–31


English Version |  Korean Version
  •   (Sookmyung Women's University)

  •   (Sookmyung Women's University)

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Abstract  

This paper examines the welfare effect of new entry and price discrimination under the vertical market structure. We focus on the different welfare implications according to the types of the entrants into the downstream market and degree of price discrimination by an upstream firm. The main results of this paper are as follows. First, in the vertical market structure, the social welfare is higher for the case where the existing upstream firm rather than a new downstream firm enters into a downstream market. Second, social welfare is higher for the case where the price discrimination is allowed than the case where it is prohibited. Third, when the price discrimination is allowed, the profit of the rival firm in the downstream market always decreases. Fourth, in the regulation of price discrimination range, the social welfare increases as the maximum allowed range goes up. Fifth, welfare effect of price discrimination depends only on the size of the sum of wholesale prices that an upstream firm charges on each downstream firm. That is, if the sum of wholesale prices under the price discrimination is lower than that under the no price discrimination case, the social welfare increases by price discrimination.


Keywords
   Vertical Market Structure, Market Entry, Price Discrimination

JEL classification codes
   D43, L13, L41
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