Faculty of Economics and Business Administration Publications Database

Incentives for Input Foreclosure

Valletti, Tommaso
Volume: 55
Number: 6
Pages: 820 - 831
Month: August
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2011
Keywords: Foreclosure; Vertical integration; Bilateral oligopoly
Abstract: We analyze the incentives of a vertically integrated firm to foreclose downstream rivals in a model of upstream price competition between suppliers of only imperfectly substitutable inputs. Our main motivation is a critical assessment of common assertions that draw inferences from pre-merger observable variables to post-merger incentives to foreclose. In particular, we find that, contrary to some commonly expressed views, high margins on the downstream and low margins on the upstream market are not good predictors for the incentives of a newly integrated firm to foreclose rivals. Besides this contribution to policy, our model also extends existing results in the literature on vertical foreclosure through allowing for the interaction of product differentiation on the upstream and on the downstream market.