IDEAS home Printed from https://ideas.repec.org/p/edn/esedps/279.html
   My bibliography  Save this paper

Competitive foreclosure

Author

Abstract

We present a model where oligopolistic firms producing substitutes compete for inputs in a decentralized market. Input suppliers are capacity constrained (or produce under exclusivity). Compared to a price-taking input market, the incentive to foreclose downstream competitors not only leads to higher input prices, but it also results in a higher aggregate amount of input acquired. This novel feature mitigates the output reducing e§ect of downstream market power and may even restore e¢ ciency in the unique (input) market clearing equilibrium. Other equilibria where Örms endogenously coordinate on which suppliers to target result in excess input supply (involuntary unemployment, if input is labor) and even higher input prices. Our insights generalize to alternative vertical structures.

Suggested Citation

  • Jozsef Sakovics & Roberto Burguet, 2017. "Competitive foreclosure," Edinburgh School of Economics Discussion Paper Series 279, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:279
    as

    Download full text from publisher

    File URL: http://www.econ.ed.ac.uk/papers/id279_esedps.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Marie-Odile Yanelle, 1997. "Banking Competition and Market Efficiency," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 215-239.
    2. Peters, Michael & Severinov, Sergei, 1997. "Competition among Sellers Who Offer Auctions Instead of Prices," Journal of Economic Theory, Elsevier, vol. 75(1), pages 141-179, July.
    3. Dastidar, Krishnendu Ghosh, 1995. "On the Existence of Pure Strategy Bertrand Equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(1), pages 19-32, January.
    4. Jeanine Miklós‐Thal & Patrick Rey & Thibaud Vergé, 2011. "Buyer Power And Intrabrand Coordination," Journal of the European Economic Association, European Economic Association, vol. 9(4), pages 721-741, August.
    5. John W. Mayo & David E.M. Sappington, 2016. "When do auctions ensure the welfare-maximizing allocation of scarce inputs?," RAND Journal of Economics, RAND Corporation, vol. 47(1), pages 186-206, February.
    6. Burguet, Roberto & Sákovics, József, 2017. "Bertrand and the long run," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 39-55.
    7. Philippe Jehiel & Benny Moldovanu, 2000. "Auctions with Downstream Interaction Among Buyers," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 768-791, Winter.
    8. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
    9. Daniel F. Spulber, 1996. "Market Making by Price-Setting Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(4), pages 559-580.
    10. Gianni De Fraja & Jozsef Sakovics, 2001. "Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 842-863, August.
    11. Péter Eső & Volker Nocke & Lucy White, 2010. "Competition for scarce resources," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 524-548, September.
    12. Patrick Rey & Michael D. Whinston, 2013. "Does retailer power lead to exclusion?," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 75-81, March.
    13. Booth, Alison L., 2014. "Wage determination and imperfect competition," Labour Economics, Elsevier, vol. 30(C), pages 53-58.
    14. Leo Kaas & Paul Madden, 2004. "A new model of equilibrium involuntary unemployment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(3), pages 507-527, March.
    15. Benoit Julien & John Kennes & Ian King, 2000. "Bidding for Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 619-649, October.
    16. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    17. Lynne M. Pepall & Daniel J. Richards, 2001. "Reach for the Stars: A Strategic Bidding Game," Economica, London School of Economics and Political Science, vol. 68(272), pages 489-504, November.
    18. Tom Lee & Louis L. Wilde, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 429-436.
    19. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
    20. Burguet, Roberto & Sakovics, Jozsef, 1999. "Imperfect Competition in Auction Designs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 231-247, February.
    21. Yongmin Chen & David E. M. Sappington, 2011. "Exclusive Contracts, Innovation, and Welfare," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 194-220, May.
    22. Koskela, Erkki & Stenbacka, Rune, 2012. "The relationship between product market competition and unemployment with profit sharing," Labour Economics, Elsevier, vol. 19(3), pages 291-297.
    23. Silvestre, Joaquim, 1993. "The Market-Power Foundations of Macroeconomic Policy," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 105-141, March.
    24. Palomino, Frederic & Sakovics, Jozsef, 2004. "Inter-league competition for talent vs. competitive balance," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 783-797, June.
    25. Larry Samuelson & George J. Mailath & Avner Shaked, 2000. "Endogenous Inequality in Integrated Labor Markets with Two-Sided Search," American Economic Review, American Economic Association, vol. 90(1), pages 46-72, March.
    26. Alan Manning & Ted To, 2002. "Oligopsony and Monopsonistic Competition in Labor Markets," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 155-174, Spring.
    27. Glenn C. Loury, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(3), pages 395-410.
    28. Stahl, Dale O, II, 1988. "Bertrand Competition for Inputs and Walrasian Outcomes," American Economic Review, American Economic Association, vol. 78(1), pages 189-201, March.
    29. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(2), pages 345-356.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Roberto Burguet & József Sákovics, 2019. "Bidding For Talent In Sport," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 85-102, January.
    2. Oz Shy & Rune Stenbacka, 2019. "Anti‐Poaching Agreements In Labor Markets," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 243-263, January.
    3. Burguet, Roberto & Sákovics, József, 2019. "Personalized prices and uncertainty in monopsony," International Journal of Industrial Organization, Elsevier, vol. 67(C).
    4. Martimort, David & Pouyet, Jérôme, 2020. "Downstream mergers in vertically related markets with capacity constraints," International Journal of Industrial Organization, Elsevier, vol. 72(C).
    5. Shy, Oz & Stenbacka, Rune, 2018. "Dynamic labor market competition and wage seniority," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 130-154.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roberto Burguet & Jozsef Sakovics, 2016. "Bidding for input in oligopoly," Edinburgh School of Economics Discussion Paper Series 266, Edinburgh School of Economics, University of Edinburgh.
    2. Martimort, David & Pouyet, Jérôme, 2020. "Downstream mergers in vertically related markets with capacity constraints," International Journal of Industrial Organization, Elsevier, vol. 72(C).
    3. Péter Eső & Volker Nocke & Lucy White, 2010. "Competition for scarce resources," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 524-548, September.
    4. Schmitz, Patrick W., 2003. "On second-price auctions and imperfect competition," Journal of Mathematical Economics, Elsevier, vol. 39(8), pages 901-909, November.
    5. Coles, Melvyn G. & Eeckhout, Jan, 2003. "Indeterminacy and directed search," Journal of Economic Theory, Elsevier, vol. 111(2), pages 265-276, August.
    6. Lester, Benjamin & Visschers, Ludo & Wolthoff, Ronald, 2017. "Competing with asking prices," Theoretical Economics, Econometric Society, vol. 12(2), May.
    7. Lester, Benjamin & Visschers, Ludo & Wolthoff, Ronald, 2014. "Competing with Asking Prices," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-37, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Deniz Selman, 2011. "Coordination Frictions and Heterogeneity in Markets with Bidding," Working Papers 2011/08, Bogazici University, Department of Economics.
    9. Peck, James, 2018. "Competing mechanisms with multi-unit consumer demand," Journal of Economic Theory, Elsevier, vol. 177(C), pages 126-161.
    10. Lester, Benjamin & Visschers, Ludo & Wolthoff, Ronald, 2015. "Dynamic Relational Contracts under Complete Information," SIRE Discussion Papers 2015-51, Scottish Institute for Research in Economics (SIRE).
    11. Etro, Federico, 2016. "Research in economics and industrial organization," Research in Economics, Elsevier, vol. 70(4), pages 511-517.
    12. Geromichalos, Athanasios, 2012. "Directed search and optimal production," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2303-2331.
    13. Gabor Virag, 2008. "Buyer heterogeneity and competing mechanism," 2008 Meeting Papers 702, Society for Economic Dynamics.
    14. Benjamin Lester & Ludo Visschers & Ronald Wolthoff, 2014. "Competing with Asking Prices (first version)," Edinburgh School of Economics Discussion Paper Series 243, Edinburgh School of Economics, University of Edinburgh.
    15. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, January.
    16. Lester, Benjamin & Visschers, Ludo & Wolthoff, Ronald, 2015. "Dynamic Relational Contracts under Complete Information," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-51, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    17. Richard Dutu & Benoit Julien & Ian King, 2009. "Liquidity Constrained Competing Auctions," Department of Economics - Working Papers Series 1068, The University of Melbourne.
    18. Committee, Nobel Prize, 2014. "Market power and regulation (scientific background)," Nobel Prize in Economics documents 2014-2, Nobel Prize Committee.
    19. Benoit Julien & John Kennes & Moritz Ritter, 2013. "Bidding for Clubs," Economics Working Papers 2013-19, Department of Economics and Business Economics, Aarhus University.
    20. Simon Loertscher & Andras Niedermayer, 2008. "Fee Setting Intermediaries: On Real Estate Agents, Stock Brokers, and Auction Houses," Discussion Papers 1472, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

    More about this item

    Keywords

    simultaneous auctions; targeted offers; vertical linkages; involuntary unemployment;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:edn:esedps:279. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Research Office (email available below). General contact details of provider: https://edirc.repec.org/data/deediuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.