1 Social Efficiency of Entry in a Vertical Structure with Technology Choice Arijit Mukherjee University of Nottingham and The Leverhulme Centre for Research in Globalisation and Economic Policy, UK Leonard F.S. Wang Department of Applied Economics, National University of Kaohsiung, Taiwan and Jen-yao Lee Department of International Business, National Kaohsiung University of Applied Science, Taiwan October 11, 2010 For presentation at the Department of Economics, National Chung Cheng University

2 Outline of the Lecture  Motivation  Oligopoly Theory at Free Entry: Overview  Social Efficiency of Entry in a Vertical Structure with Technology Choice  Further Considerations

3  Is free entry socially desirable? In an influential work, Mankiw and Whinston (1986) show that the answer to this question is generally negative in an oligopolistic market with homogeneous products and scale economies, thus creating the rationale for anti-competitive entry regulation in certain markets.  Ghosh and Morita (2007) consider a successive vertical oligopoly model, in which downstream firms produce a final product using an intermediate product purchased from upstream firms. They demonstrate that free entry in an industry that produces a homogeneous product can lead to a socially insufficient, rather than excessive, number of firms when its vertical relationship to the other industry is explicitly taken into account. Motivation

4  We show in this paper that the applicability of the “excess-entry theorem” in industries with effective vertical relationships is actually more than what has been suggested by them. In a vertical structure, instead of focusing only at the effects of entry of firms, we also consider an important non- production activity of the firms, viz., investments in R&D, which helps to determine the technologies of the firms depending on the market structure.

5  Considering entry of firms in the downstream sector, we show that entry is socially excessive if either the slope of the marginal cost of R&D is small (which creates large incentive for innovation) or knowledge spillover is large (which helps to reduce the cost of the firms). Hence, while considering the problem of social efficiency of entry in a broader context with endogenous technology choice, entry can still be excessive in vertical structures, thus justifying the anti-competitive regulation suggested by Mankiw and Whinston (1986).

6 Oligopoly Theory at Free Entry: Overview 1.Oligopoly at Free Entry Mukherjee (2005) Pinopoulos (2010) Matsumura and Okamura (2006) Ghosh and Morita (2007a, b)ab Mukherjee (2008) Mukherjee, Broll and Mukherjee (2009) Mukherjee (2010) 2.Mixed Oligopoly at Free Entry Matsumura and Kanda (2005) Wang and Chen (2010)

7 Social Efficiency of Entry in a Vertical Structure with Technology Choice

8 Further Considerations  Consider the case of free entry in the upstream sector Matsushima (2006)  Consider the case of upstream mixed oligopoly Wang and Lee (2010)  Consider product differentiation Liu and Wang (2010)