In the conventional entry model, the incumbent and potential entrant firms are both producers and sellers of the final product. Therefore, only strategic entry deterrence aspects have been emphasized. The present paper extends the current entry deterrence literature by considering entry facilitation in a vertically related market where an upstream incumbent supplies inputs to a downstream existing firm. It may be in the interest of the incumbent to charge a lower input price to have an additional potential downstream firm enter the market. In the multi-stage game framework, the motivation of the upstream incumbent to induce the entry of a downstream firm becomes lower as the fixed entry cost to the potential downstream firm increases. This is due to the fact that the greater the fixed entry cost to the entrant, more the incumbent has to deviate from its ideal first best level.
The paper further examines the entry facilitation when the incumbent is able to implement price discrimination. It shows that the upstream incumbent may charge a higher (lower) input price to downstream firm with higher (lower) production cost which is contrary to previous findings of price discrimination in an intermediate goods market.
Finally, the paper examines the relation between product differentiation and entry facilitation. The result shows that when the downstream existing firm has cost advantage over the potential entrant, we observe that the input price to actuate entry is positively related to the degree of product differentiation. In this regard, product differentiation has the function of generating entry.
