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Systems Competition, Vertical Merger, and Foreclosure

  • Jeffrey Church
  • Neil Gandal

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 Wiley Blackwell 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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