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Incentives for input foreclosure

  • Inderst, Roman
  • Valletti, Tommaso

We analyze the incentives of a vertically integrated firm to foreclose downstream rivals in a model of upstream price competition between suppliers of only imperfectly substitutable inputs. Our main motivation is a critical assessment of common assertions that draw inferences from pre-merger observable variables to post-merger incentives to foreclose. In particular, we find that, contrary to some commonly expressed views, high margins on the downstream and low margins on the upstream market are not good predictors for the incentives of a newly integrated firm to foreclose rivals. Besides this contribution to policy, our model also extends existing results in the literature on vertical foreclosure through allowing for the interaction of product differentiation on the upstream and on the downstream market.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 6 (August)
Pages: 820-831

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Handle: RePEc:eee:eecrev:v:55:y:2011:i:6:p:820-831
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Reiffen, David, 1992. "Equilibrium Vertical Foreclosure: Comment," American Economic Review, American Economic Association, vol. 82(3), pages 694-97, June.
  2. Höffler, Felix & Schmidt, Klaus M., 2008. "Two tales on resale," Munich Reprints in Economics 19443, University of Munich, Department of Economics.
  3. Alexander Schrader & Stephen Martin, 1998. "Vertical Market Participation," Review of Industrial Organization, Springer, vol. 13(3), pages 321-331, June.
  4. Eric Avenel & Corinne Barlet, 2000. "Vertical Foreclosure, Technological Choice, and Entry on the Intermediate Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(2), pages 211-230, 06.
  5. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  6. Damien Neven & Svend Albæk, 2007. "Economics at DG Competition 2006–2007," Review of Industrial Organization, Springer, vol. 31(2), pages 139-153, September.
  7. Roman Inderst & Tommaso Valletti, 2009. "Indirect versus Direct Constraints in Markets with Vertical Integration," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(3), pages 527-546, 09.
  8. Quirmbach, Herman C, 1992. "Sequential Vertical Integration," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 1101-11, August.
  9. Gérard Gaudet & Ngo Van Long, 1995. "Vertical Integration, Foreclosure and Profits in the Presence of Double Marginalisation," CIRANO Working Papers 95s-40, CIRANO.
  10. Choi, J.P. & Yi, S.S., 1997. "Vertical Foreclosure with the Choice of Input Specifications," Discussion Paper 1997-16, Tilburg University, Center for Economic Research.
  11. Warren-Boulton, Frederick R, 1974. "Vertical Control with Variable Proportions," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 783-802, July/Aug..
  12. Normann, Hans-Theo, 2009. "Vertical integration, raising rivals' costs and upstream collusion," European Economic Review, Elsevier, vol. 53(4), pages 461-480, May.
  13. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-42, March.
  14. Ordover, Janusz & Shaffer, Greg, 2007. "Wholesale access in multi-firm markets: When is it profitable to supply a competitor?," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 1026-1045, October.
  15. Richard S. Higgins, 1999. "Competitive vertical foreclosure," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(4), pages 229-237.
  16. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
  17. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
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