Market foreclosure

Market foreclosure is the exclusion that results when a downstream buyer is denied access to an upstream supplier (Upstream foreclosure) or when an upstream supplier is denied access to a downstream buyer.^[1] A supplier or intermediary in a supply chain can acquire this form of market power through mergers up and down its value chain (see vertical integration).

For example, in industries like gasoline refining, distribution and retail, it is possible to argue that a vertically-integrated refiner may reduce competition through practices that constrain supply to retailers outside its network of related firms. Some researchers have suggested that US wholesale gasoline prices may be inflated by 0.2 to 0.6 cents per gallon because of market power wielded by the vertically integrated players in the industry.^[2]

Does vertical integration always carry the danger of foreclosure? It does not appear to be so. Hortacsu and Syverson, reviewing plant and market data in the US cement and concrete industries over a 34-year span, find that more vertical integration leads to lower prices and higher quantities.^[3] This is contrary to what one would expect in a market experiencing foreclosure by players with market power. Similarly, a review of exclusive dealing practices in the Chicago beer market by Asker fails to show foreclosure effects.^[4]

On the other hand, an examination of media markets shows that integrated operators are likely exclude rival program services, blocking some program services from the distribution networks of vertically integrated cable system operators.^[5]

See also

• Vertical integration
• Exclusive dealing

References

1. ^ Stefanadis, C: "Downstream Vertical Foreclosure and Upstream Innovation", Journal of Industrial Economics, 1997, http://www.jstor.org/pss/2950611
2. ^ Aydemir, Z: "Estimating Vertical Foreclosure in U.S. Gasoline Supply", http://ideas.repec.org/p/soz/wpaper/0212.html
3. ^ Ali Hortaçsu and Chad Syverson:"Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices", JPE 2007, http://www.journals.uchicago.edu/doi/abs/10.1086/514347
4. ^ John Asker:"Diagnosing Foreclosure due to Exclusive Dealing", http://pages.stern.nyu.edu/~jasker/Paper1_ExclusiveForeclosure.pdf
5. ^ Chipty, Tasneem: "Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry", AER 2001(June)