Vertical Foreclosure with the Choice of Input Specifications
Volume: Volume 31, No. 4
Issue: Winter 2000
Pages: pp. 717-743
Authors: Jay Pil Choi and Sang-Seung Yi
Title: Vertical Foreclosure with the Choice of Input Specifications
Abstract: We develop an equilibrium model of vertical foreclosure with the choice of input specifications. 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 with vertical integration can be explained by the externalities the choice of a specialized input entails; vertical integration allows the upstream firm to internalize the benefit of raising the rival firm's costs at the downstream level. We derive conditions for equilibrium vertical foreclosure to occur and discuss its welfare consequences.
JEL Classification
Vertical Restraints Resale Price Maintenance Quantity Discounts (L420 )
Firm Organization and Market Structure: Markets vs. Hierarchies Vertical Integration (L220 )
Firm Firms Vertical Integration