Dynamic Vertical Foreclosure

45 Pages Posted: 14 Dec 2018

See all articles by Chiara Fumagalli

Chiara Fumagalli

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Massimo Motta

European Union - European Commission

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Date Written: December 2018

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, monopolising 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.

Keywords: Inefficient foreclosure, Refusal to supply, Scale economies, Exclusion, Monopolisation

JEL Classification: K21, L41

Suggested Citation

Fumagalli, Chiara and Motta, Massimo, Dynamic Vertical Foreclosure (December 2018). BAFFI CAREFIN Centre Research Paper No. 2018-99. Available at SSRN: https://ssrn.com/abstract=3301300 or http://dx.doi.org/10.2139/ssrn.3301300

Chiara Fumagalli (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy
+39 02 5836 5311 (Phone)
+39 02 5836 5318 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Massimo Motta

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

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