Instituto de Economía

Abstract: The aim of this paper is to emphasize that the rational of vertical foreclosure can have a dynamic component. In our model a vertically integrated incumbent sacrifices current profits by foreclosing a more efficient downstream rival. However, by engaging in refusal to supply, the vertically integrated incumbent will affect the future market structure and will earn larger profits. In particular, lack of suitable access to the input may deprive the rival of the critical profits (or, more generally, of the critical scale, customer base, or reputation) it needs in order to be successful in the downstream market. In turn, weakened competition for input procurement, by reducing the post-entry profits of the prospective upstream competitor, may discourage future upstream entry and prevents the incumbent from entirely losing its future profits. The paper also shows that if future entry cannot be discouraged, the incentives to engage in vertical foreclosure are indeed reinforced. In this case foreclosure is motivated by the incumbent’s intent to transfer its monopoly power from the upstream to the downstream market.