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Systems Competition, Vertical Merger, and Foreclosure

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Author Info
Jeffrey Church
Neil Gandal

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Abstract

We address the possibility of foreclosure in markets where the final good consists of a system composed of a hardware good and complementary software and the value of the system depends on the availability of software. Foreclosure occurs when a hardware firm merges with a software firm and the integrated firm makes its software incompatible with a rival technology or system. We find that foreclosure can be an equilibrium outcome where both the merger and compatibility decisions are part of a multistage game which permits the foreclosed hardware firm to play a number of counter-strategies. Further, foreclosure can be an effective strategy to monopolize the hardware market. Copyright (c) 2000 Massachusetts Institute of Technology.

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

Volume (Year): 9 (2000)
Issue (Month): 1 (03)
Pages: 25-51
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Handle: RePEc:bla:jemstr:v:9:y:2000:i:1:p:25-51

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  1. Church, Jeffrey & Gandal, Neil & Krause, David, 2003. "Indirect Network Effects and Adoption Externalities," CEPR Discussion Papers 3738, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Oilver Budzinski & Katharina Wacker, 2007. "The Prohibition of the Proposed Springer-ProSiebenSat.1-Merger: How much Economics in German Merger Control?," Marburg Working Papers on Economics 200704, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung). [Downloadable!]
  3. Ramón Faulí-Oller & Joel Sandonís, 2003. "On The Competitive Effects Of Vertical Integration Under Product Differentiation," Working Papers. Serie AD 2003-31, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  4. Nisvan Erkal, 2003. "Buyer-Supplier Interaction, Asset Specificity, And Product Choice," Department of Economics - Working Papers Series 885, The University of Melbourne. [Downloadable!]
    Other versions:
  5. Zava Aydemir & Stefan Buehler, 2002. "Estimating Vertical Foreclosure in U.S. Gasoline Supply," Working Papers 0212, University of Zurich, Socioeconomic Institute. [Downloadable!]
    Other versions:
  6. Christopher R. Knittel & Victor Stango, 2006. "Strategic Incompatibility in ATM Markets," NBER Working Papers 12604, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Hans-Theo Normann, 2004. "Equilibrium Vertical Foreclosure in the Repeated Game," Industrial Organization 0408008, EconWPA. [Downloadable!]
  8. Dogan, Pinar, 2005. "Vertical Networks, Integration, and Connectivity," Working Paper Series rwp05-061, Harvard University, John F. Kennedy School of Government. [Downloadable!]
  9. Ricardo Flores-Fillol & Rafael Moner-Colonques, 2006. "Endogenous Integration and Welfare in Complementary Goods Markets," UFAE and IAE Working Papers 658.06, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
  10. Roberto Hernan & Praveen Kujal, 2006. "Vertical Integration, Market Foreclosure And Quality Investment," Economics Working Papers we061405, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  11. Christopher R. Knittel & Victor Stango, 2004. "Incompatibility, Product Attributes and Consumer Welfare: Evidence from ATMs," Working Papers 04-06, NET Institute, revised Oct 2004. [Downloadable!]
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  12. Bastian Westbrock, 2004. "Horizontal integration in markets for complementary components and vertical product differentiation: A case-based analysis in the semiconductor industry," Working Papers 05-05, Utrecht School of Economics. [Downloadable!]
  13. Nicholas Economides & Giuseppe Lopomo & Glenn Woroch, 2005. "Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing," Working Papers 05-10, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
    Other versions:
  14. Michael H. Riordan, 2005. "Competitive effects of vertical integration," Discussion Papers 0506-11, Columbia University, Department of Economics. [Downloadable!]
  15. Jose Pedro Pontes, 2005. "Input Specificity and Location," Working Papers 2005/01, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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