Free entry and social efficiency under vertical oligopoly

We analyze a successive vertical oligopoly model that incorporates vertical relationships between industries and demonstrate that free entry in an industry that produces a homogeneous product can lead to a socially insufficient number of firms. This is in contrast with the previous findings that, under Cournot oligopoly with fixed set-up costs, level of entry in the free-entry equilibrium is socially excessive. It has often been argued that this result can provide a justification for apparently anticompetitive entry regulations. Our finding yields an important policy implication that such a justification is not necessarily valid when vertical relationships are taken into account.