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Systems Competition, Vertical Merger, and Foreclosure

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  • Jeffrey Church
  • Neil Gandal

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.

Suggested Citation

  • Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 25-51, March.
  • Handle: RePEc:bla:jemstr:v:9:y:2000:i:1:p:25-51
    DOI: 10.1111/j.1430-9134.2000.00025.x
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    References listed on IDEAS

    as
    1. Reiffen, David, 1992. "Equilibrium Vertical Foreclosure: Comment," American Economic Review, American Economic Association, vol. 82(3), pages 694-697, June.
    2. Church, Jeffrey & Gandal, Neil, 1992. "Integration, Complementary Products, and Variety," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 651-675, Winter.
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    More about this item

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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