Academic Commons

Reports

Equilibrium Vertical Foreclosure with Investment

Choi, Jay Pil; Yi, Sang-Seung

One of the most enduring controversies in antitrust concerns the potential foreclosure effects of vertical integration. In a recent paper, Ordover, Saloner and Saloner and Salop (1990) construct a model of vertical integration in which vertical foreclosure emerges as the equilibrium outcome. However, as is well-known, OSS's result breaks down if the vertically integrated firm cannot make the price commitment. In this paper, we reexamine the foreclosure theory of vertical integration by extending OSS's model to include upstream market power and investments. Cost-reducing investments introduce a channel through which the integrated firm can credibly commit itself to a higher input price at which it is willing to supply the unintegrated downstream firm. We show that a profitable but anticompetitive (both for consumer welfare and for aggregate efficiency) vertical causing hold-out problems between the input suppliers. In contrast to OSS's model, where vertical integration (even with commitment) is not effective under Cournot downstream competition, vertical integration in our model can be both effective and anticompetitive even under Cournot downstream competition.

Subjects

Files

More About This Work

Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 9697-12
Published Here
March 3, 2011

Notes

November 1996

Academic Commons provides global access to research and scholarship produced at Columbia University, Barnard College, Teachers College, Union Theological Seminary and Jewish Theological Seminary. Academic Commons is managed by the Columbia University Libraries.