Vertical Mergers, Foreclosure, and Rivals’ Exit: The Role of Fringe Firms

We analyze vertical mergers when the upstream and downstream markets each have a dominant firm and a competitive fringe. Adding a fringe at each stage of the successive monopoly model of Spengler (1950) generates the anticompetitive mechanisms of the post-Chicago literature. The merger eliminates double marginalization but creates incentives for input foreclosure, customer foreclosure, and fringe exit. Our main result links customer foreclosure to input foreclosure. When the merged firm sources internally, independent suppliers with high operating costs can exit. Their exit reduces the supply available to downstream rivals and, relative to retaining that capacity, raises the input price rivals pay and the merged firm’s foreclosure wedge. In an equilibrium construction, consumer prices remain below the pre-merger level. With atomless participation, consumer harm is ruled out under stated conditions; with indivisible downstream participation, it can arise. We derive implications for merger review under Section 7 of the Clayton Act.