Vertical Foreclosure with the Choice of Input Specifications

40 Pages Posted: 4 Feb 1998

See all articles by Jay Pil Choi

Jay Pil Choi

Michigan State University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Sang-Seung Yi

Seoul National University - School of Economics

Date Written: January 1997

Abstract

This paper develops an equilibrium model of vertical foreclosure with the choice of input specifications. In this model, vertical foreclosure occurs as the upstream division of the integrated firm makes a specialized input for its sister downstream division while it would, as an independent firm, provide a generalized input. The changes in incentives with vertical integration can be explained by the externalities the choice of a specialized input entails; vertical integration allows the upstream firm to internalize the benefit of raising the rival firm's costs at the downstream level. The choice of a specialized input by the integrated firm serves as a natural commitment mechanism not to supply the rival downstream firms and, thus, enables us to dispense with the controversial price commitment assumption in the literature. We derive conditions for equilibrium vertical foreclosure to occur and discuss its welfare consequences.

JEL Classification: L22, L1, L4

Suggested Citation

Choi, Jay Pil and Yi, Sang-Seung, Vertical Foreclosure with the Choice of Input Specifications (January 1997). Available at SSRN: https://ssrn.com/abstract=54869 or http://dx.doi.org/10.2139/ssrn.54869

Jay Pil Choi (Contact Author)

Michigan State University - Department of Economics ( email )

101 Marshall Hall
East Lansing, MI 48824
United States
517-353-7281 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Sang-Seung Yi

Seoul National University - School of Economics ( email )

San 56-1, Silim-dong, Kwanak-ku
Seoul 151-742
Korea