We study the impact of input prices on an entrant’s profit when firms are engaged in multi-product competition. We consider a setting with both horizontal and vertical differentiation, in which a vertically integrated firm controls the input that is required for the supply of the high-quality product. We establish the conditions under which the entrant is better off from an increase in the wholesale price of this critical input. This possibility contrasts with the existing literature that, under linear demands, finds a non-positive relationship between the input price and the single-product entrant’s profit.
Review of Industrial Organization – Springer Journals
Published: Jul 19, 2016
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