Market foreclosure
Market foreclosure or vertical foreclosure, is the production limitation put on a producing organisation if either it is denied access to a supplier (upstream foreclosure), or it is denied access to a downstream buyer (downstream foreclosure).[1] A supplier or intermediary in a supply chain could acquire this form of market power against competitors through means of mergers and acquisitions. This amalgamation of suppliers and customers demonstrates vertical integration along a value chain with various strategic and efficiency benefits including elimination of successive monopoly markups and lowering transaction costs.[2]
Examples
[edit]The television industry allows for certain insight when considering vertical integration due to the level of differentiating aspects the market provides. Within this industry, media markets have experienced various occasions in which integrated operators attempt to deter rival program services by means of increasing barriers to entry. Transaction costs being one of these barriers, plays an overwhelming role, effectively guaranteeing networks that have vertically integrated the upper hand in the market due to ability of self production while simultaneously excluding rival program services.[3]
Gasoline production provides another example of supply restraints and competitive dominance by means of vertical integration. Market foreclosure plays a consistent role in the dynamics of the gasoline industry and more specifically with large refineries with significant capabilities of production. Researchers have estimated that US wholesale gasoline prices have been raised by 0.2 to 0.6 cents per gallon due to the market power wielded by vertically integrated players in the industry.[4]
Vertical integration without market foreclosure
[edit]Although generally the trend with vertical integration, the outcome does not always end in a foreclosed market. Researchers reviewing plant and market data in the US cement and concrete industries over a 34-year span, found that vertical integration led to lower prices and higher quantities for consumers. Presumably, this was because of production efficiencies from integration which proved contrary to what one would otherwise expect in a market experiencing foreclosure.[5] Similarly, a review of exclusive dealing practices in the Chicago beer market found evidence that contradicts the effects that is market foreclosure stemming from vertical integration. Research by John Asker conveyed evidence, not unlike the cement and concrete industries; that beer sales weren't diminishing for exclusive markets relative to non-exclusive markets.[6]
Competition and antitrust implications
[edit]The idea of market foreclosure is significant for the economics of competition and antitrust, as it brings up the opportunity of vertical integration for firms to influence market structures and the competitive environment by excluding their competitors from access to necessary inputs, customer base or distribution channels [7][8]. Foreclosure is of great concern for competition authorities since it results in reduced competitive pressure, higher prices, reduced innovation and damage to consumers' interests [9]. The risk of market foreclosure becomes particularly evident in cases when network effects, economies of scale and ownership of infrastructure or information become important.
In general, antitrust investigation includes two key questions: the ability and motivation of a firm to perform foreclosure activities [7],[9]. It could be either complete foreclosure, meaning that competitors do not have access to essential input or customers or partial foreclosure, implying that competitors still remain on the market, but face certain difficulties created by the rival firm [7]. By creating cost disadvantages, denying market access and deterring entrants, the practices of market foreclosure destroy the competition and reinforce the position of the incumbent [8],[10]. However, it has been observed that the economic perspective on market foreclosure is not necessarily anticompetitive [7][11]. Economies such as cost savings, better coordination of the production and distribution process, as well as absence of monopoly charges or double marginalisation are potential benefits of vertical integration [8][9]. Investment and innovation may also be facilitated through vertical relationships as a result of improved incentives for cooperation and contract safety [10].
Consequently, competition authorities have generally considered market foreclosure on a case-by-case basis where anticompetitive concerns and economies would be balanced [9][10]. The significance of such an analysis has become evident in relation to mergers and antitrust issues related to digital platforms, telecommunications, energy and media sectors, inter alia, since there could be potential for harming competitors as well as for creating economies by controlling data, network and distribution channels [7][11].
See also
[edit]References
[edit]- ↑ Christodoulos Stefanadis. Downstream Vertical Foreclosure and Upstream Innovation. Journal of Industrial Economics. December 1997
- ↑ Markus, Reisinger; Tarantino, Emanuele (Fall 2015). "Vertical integration, foreclosure, and productive efficiency". The RAND Journal of Economics.
- ↑ Tasneem Chipty. Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry. American Economic Review, June 2001
- ↑ Stefan Buehler; Zava Aydemir. Estimating Vertical Foreclosure in U.S. Gasoline Supply. University of Zurich, Socieconomic Institute Working Paper No. 0212. December 2002
- ↑ Ali Hortaçsu; Chad Syverson. Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices. Journal of Political Economy. April 2007
- ↑ John Asker. Diagnosing Foreclosure due to Exclusive Dealing. September 2015
- 1 2 3 4 5 Rey, Patrick; Tirole, Jean; Armstrong, Mark; Porter, Robert H. (2007). "A Primer on Foreclosure". Handbook of Industrial Organization. Elsevier. pp. 2145–2220. ISBN 9780444824356.
- 1 2 3 Tirole, Jean (1988). The Theory of Industrial Organization. Cambridge, MA: MIT Press. pp. 15–18. ISBN 9780262200714.
- 1 2 3 4 Carlton, Dennis W.; Perloff, Jeffrey M. (2015-04-14). Modern Industrial Organization, Global Edition. Pearson Education. ISBN 978-1-292-08786-3.
- 1 2 3 Motta, Massimo (2004). Competition Policy: Theory and Practice. Cambridge: Cambridge University Press. pp. 45–49. ISBN 9780521816632.
- 1 2 "The International Handbook of Competition". www.e-elgar.com. Retrieved 2026-07-31.