Vertical foreclosure: a policy framework
In such industries, integration and exclusive contracts between vertically related firms may have important welfare enhancing effects, but can also deny or limit rivals' access to input or customers, leading to foreclosure. Foreclosure can harm welfare if it reduces competition. This document provides policymakers with a framework to assess the potential for welfare reducing foreclosure of vertical integration and vertical restraints and describes possible remedies. The framework consists of four steps. Each step requires its own detailed analysis.
- First, market power should exist either upstream or downstream.
- Second, a theory of foreclosure should be formulated that explains why foreclosure is a profitable equilibrium strategy.
- Third, the existence and magnitude of potential welfare enhancing effects of the vertical restrains or vertical integration should be assessed.
- Fourth, suitable policies to address foreclosure should be found.