DP2908 Buyers' Coordination and Entry

Author(s): Chiara Fumagalli, Massimo Motta
Publication Date: August 2001
Keyword(s): contractual clauses, countervailing power, entry, exclusion, miscoordination, retailers
JEL(s): D40, L13, L22, L40, M21
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2908

Miscoordination of buyers might prevent entry in an industry with an incumbent and a more efficient potential entrant. Buyers' power therefore favours entry by eliminating coordination problems. We also identify a mechanism which facilitates entry: if the potential entrant could credibly offer to pay a penalty for unfulfilled orders, miscoordination would be eliminated. Without the penalty, we show that downstream competition also facilitates entry. The stronger the competition among buyers the less likely that miscoordination arises.