Systems Competition, Vertical Merger, and Foreclosure

Jeffrey Church and Neil Gandal

Journal of Economics & Management Strategy, 2000, vol. 9, issue 1, 25-51

Abstract: We address the possibility of foreclosure in markets where the final good consists of a system composed of a hardware good and complementary software and the value of the system depends on the availability of software. Foreclosure occurs when a hardware firm merges with a software firm and the integrated firm makes its software incompatible with a rival technology or system. We find that foreclosure can be an equilibrium outcome where both the merger and compatibility decisions are part of a multistage game which permits the foreclosed hardware firm to play a number of counter‐strategies. Further, foreclosure can be an effective strategy to monopolize the hardware market.

Date: 2000
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https://doi.org/10.1111/j.1430-9134.2000.00025.x

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Working Paper: Systems Competition, Vertical Merger and Foreclosure (1996)
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