Working Paper: CEPR ID: DP12498
Authors: Chiara Fumagalli; Massimo Motta
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 (or sales) it needs to be successful. In turn, monopolising the downstream market may prevent the incumbent from losing its future profits because: (a) it allows the incumbent to extract 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; exclusion; monopolisation
JEL Codes: K21; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| refusal to supply (D45) | downstream market monopolization (L12) |
| refusal to supply (D45) | future entry of upstream competitors (L13) |
| refusal to supply (D45) | incumbent maintains monopolistic position (D42) |