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Dynamic Vertical Foreclosure

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Abstract

This paper shows that vertical foreclosure can have a dynamic rationale. By refusing to supply an efficient downstream rival, a vertically integrated incumbent sacrifices current profits but can exclude the rival by depriving it of the critical profits it needs to be successful. In turn, monopolizing the downstream market may prevent the incumbent from losing most of its future profits because: (a) it allows the incumbent to extract more rents from an efficient upstream rival if future upstream entry cannot be discouraged; or (b) it also deters future upstream entry by weakening competition for the input and reducing the post-entry profits of the prospective upstream competitor.

Suggested Citation

  • Chiara Fumagalli & Massimo Motta, 2019. "Dynamic Vertical Foreclosure," CSEF Working Papers 522, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:522
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    File URL: http://www.csef.it/WP/wp522.pdf
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    References listed on IDEAS

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    1. Jullien, Bruno & Rey, Patrick & Saavedra, Claudia, 2014. "The Economics of Margin Squeeze," CEPR Discussion Papers 9905, C.E.P.R. Discussion Papers.
    2. Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
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    More about this item

    Keywords

    Inefficient foreclosure; Refusal to supply; Scale economies; Exclusion; Monopolization;

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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