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Foreclosure with Incomplete Information

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  • Lucy White
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    Abstract

    "We investigate the robustness of the new foreclosure doctrine and its associated welfare implications to the introduction of incomplete information. In particular, we let the upstream firm's marginal cost be private information, unknown to the downstream firms. The previous literature has argued that vertical integration is harmful because it allows an upstream monopolist to limit output to monopoly levels, whereas a disintegrated structure will "over-sell," producing more in equilibrium. By contrast, we find that with incomplete information, high-cost firms will often "under-sell" in equilibrium, that is, supply less than their monopoly output. Low-cost firms continue to over-sell, so all types of firms have a reason to integrate downstream, but this is socially harmful only for low-cost types. For high-cost firms vertical integration can be Pareto-improving, resulting in higher output, profits, and consumer surplus." Copyright 2007, The Author(s) Journal Compilation (c) 2007 Blackwell Publishing.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

    Volume (Year): 16 (2007)
    Issue (Month): 2 (06)
    Pages: 507-535

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    Handle: RePEc:bla:jemstr:v:16:y:2007:i:2:p:507-535

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    Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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    Web: http://www.blackwellpublishing.com/journal.asp?ref=1058-6407&site=1

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    Cited by:
    1. Thomas, Charles J., 2011. "Vertical mergers in procurement markets," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 200-209, March.
    2. Yaron Yehezkel, 2008. "Retailers' choice of product variety and exclusive dealing under asymmetric information," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 115-143.
    3. Reisinger, Markus & Schnitzer, Monika E, 2008. "A Model of Vertical Oligopolistic Competition," Department of Economics, Working Paper Series qt3n9000fg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. Karp, Larry & Perloff, Jeffrey, 2011. "The iPhone Goes Downstream: Mandatory Universal Distribution∗," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7vc007jh, Department of Agricultural & Resource Economics, UC Berkeley.

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