A Note to Investigate the Welfare: When the Upstream Firm Enters the Downstream Market

Abstract

To investigate the changes of welfare and the degree of exploitation on the consumer side when the upstream firm enters the downstream market, we construct a quantity competition model to analyze the changes in consumers` welfare and the profits of upstream and downstream firms. The main findings of this note are as follows: the markup has a negative effect in consumer`s surplus and the degree of exploitation will deteriorate when the upstream firm goes into the other market. In addition, the profits in the firm which expands his production scale to downstream will decline when the markup level rises, but with no obvious effect in original downstream firm.