Profit‐Raising Entry With Upstream Advertising

ABSTRACT We consider a vertical market structure involving an upstream firm that invests in informative advertising and downstream firms producing differentiated products. We investigate whether the entry of new firms can enhance the profits of incumbents in the downstream market. Our findings show that entry may increase incumbent firms' profits when the degree of product substitutability is low or the number of downstream firms is small. This result reverses the conventional view that entry always harms the profits of incumbents by bringing competition. Additionally, we demonstrate that our main results hold under persuasive upstream advertising, downstream informative advertising, and Bertrand competition settings.