DP12498 Dynamic Vertical Foreclosure

Author(s): Chiara Fumagalli, Massimo Motta
Publication Date: December 2017
Keyword(s): Exclusion, Inefficient foreclosure, Monopolisation, Refusal to supply
JEL(s): K21, L41
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12498

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 (or sales) it needs to be successful. In turn, monopolising the downstream market may prevent the incumbent from losing its future profits because: (a) it allows the incumbent to extract 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.