Foreclosure with Incomplete Information

40 Pages Posted: 13 Aug 2003

See all articles by Lucy White

Lucy White

Centre for Economic Policy Research (CEPR); Boston University - Department of Finance & Economics

Date Written: June 2003

Abstract

We investigate the robustness of the new foreclosure doctrine and its associated welfare implications to the introduction of incomplete information. In particular, we let the upstream firm's marginal cost be private information, unknown to the downstream firms. The previous literature has argued that vertical integration is harmful because it allows an upstream monopolist to limit output to monopoly levels, whereas a disintegrated structure will 'over-sell', producing more in equilibrium. By contrast, we find that with incomplete information, high-cost firms will often 'under-sell' in equilibrium; that is, supply less than their monopoly output. Low-cost firms continue to over-sell, so all types of firms have a reason to integrate downstream, but this is socially harmful only for low-cost types. For high-cost firms vertical integration can be Pareto-improving, resulting in higher output, profits and consumer surplus.

Keywords: Foreclosure, vertical integration, asymmetric information

JEL Classification: D42, D82, L12, L42

Suggested Citation

White, Lucy, Foreclosure with Incomplete Information (June 2003). Available at SSRN: https://ssrn.com/abstract=433804

Lucy White (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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