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Vertical foreclosure, a policy framework

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Author Info
Michiel Bijlsma ()
Viktoria Kocsis ()
Victoria Shestalova ()
Gijsbert Zwart ()

Additional information is available for the following registered author(s):

Abstract

Whenever you phone your mother, switch on the light, or buy health insurance you purchase a service or product from a chain of vertically related industries. Providers of these products or services need access to a telecommunications network, an electricity network or to health care services. In such industries, integration and exclusive contracts between vertically related firms may have important welfare enhancing effects, but can also deny or limit rivals’ access to input or customers, leading to foreclosure. Foreclosure can harm welfare if it reduces competition. This document provides policymakers with a framework to assess the potential for welfare reducing foreclosure of vertical integration and vertical restraints and describes possible remedies. The framework consists of four steps. Each step requires its own detailed analysis. First, market power should exist either upstream or downstream. Second, a theory of foreclosure should be formulated that explains why foreclosure is a profitable equilibrium strategy. Third, the existence and magnitude of potential welfare enhancing effects of the vertical restrains or vertical integration should be assessed. Fourth, suitable policies to address foreclosure should be found.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Documents with number 157.

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Date of creation: Jan 2008
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Handle: RePEc:cpb:docmnt:157

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Related research
Keywords: Vertical foreclosure Competition policy Network industries

Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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