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Buyer power with atomistic upstream entry: Can downstream consolidation increase production and welfare?

Pierre Mérel and Richard J. Sexton

International Journal of Industrial Organization, 2017, vol. 50, issue C, 259-293

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.

Keywords: Industry concentration; Monopsony power; Hold up; Entry; Merger (search for similar items in EconPapers)
JEL-codes: L1 L4 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:50:y:2017:i:c:p:259-293

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