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Market foreclosure is the exclusion that results when a downstream buyer is denied access to an upstream supplier (caused from an Upstream foreclosure) or when an upstream supplier is denied access to a downstream buyer. A supplier or intermediary in a supply chain can acquire this form of market power through mergers and acquisitions up and down its value chain (vertical integration).
Vertical integration does not always carry the danger of foreclosure. Hortacsu and Syverson reviewed plant and market data in the US cement and concrete industries over a 34-year span; they found that vertical integration lead to lower prices and higher quantities for consumers.
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.
On the other hand, an examination of media markets showed that integrated operators are likely to exclude rival program services, and attempt to increase the barrier to entry in the market. Thus, effectively blocking some program services from the distribution networks of vertically integrated cable system operators.
For example, in industries like gasoline refining, distribution, and retail; it is possible to argue that a vertically-integrated refiner reduces 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 due to the market power wielded by vertically integrated players in the industry.
- Stefanadis, C: "Downstream Vertical Foreclosure and Upstream Innovation", Journal of Industrial Economics, 1997, http://www.jstor.org/pss/2950611
- 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
- John Asker:"Diagnosing Foreclosure due to Exclusive Dealing", http://pages.stern.nyu.edu/~jasker/Paper1_ExclusiveForeclosure.pdf
- Chipty, Tasneem: "Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry", AER 2001(June)
- Aydemir, Z: "Estimating Vertical Foreclosure in U.S. Gasoline Supply", https://ideas.repec.org/p/soz/wpaper/0212.html