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Vertical Foreclosure with the Choice of Input Specifications

Jay Pil Choi; Sang-Seung Yi

Title:
Vertical Foreclosure with the Choice of Input Specifications
Author(s):
Choi, Jay Pil
Yi, Sang-Seung
Date:
Type:
Working papers
Department:
Economics
Permanent URL:
Series:
Department of Economics Discussion Papers
Part Number:
9697-11
Publisher:
Department of Economics, Columbia University
Publisher Location:
New York
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 whit vertical integration allows the upstream firm to internalize the benefit of raising the rival firm's cost 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.
Subject(s):
Economic theory
Economics, Commerce-Business
Item views:
265
Metadata:
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