Vertical Mergers, Foreclosure, and Rivals’ Exit: The Role of Fringe Firms

Roger D. Blair and Javier D. Donna
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Roger D. Blair: University of Florida
Javier D. Donna: University of Miami

No 410, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: We analyze vertical mergers when the upstream and downstream markets each have a dominant firm and a competitive fringe. Adding a fringe at each stage of the successive monopoly model of Spengler (1950) generates the anticompetitive mechanisms of the post-Chicago literature. The merger eliminates double marginalization but creates incentives for input foreclosure, customer foreclosure, and fringe exit. Our main result links customer foreclosure to input foreclosure. When the merged firm sources internally, independent suppliers with high operating costs can exit. Their exit reduces the supply available to downstream rivals and, relative to retaining that capacity, raises the input price rivals pay and the merged firm’s foreclosure wedge. In an equilibrium construction, consumer prices remain below the pre-merger level. With atomless participation, consumer harm is ruled out under stated conditions; with indivisible downstream participation, it can arise. We derive implications for merger review under Section 7 of the Clayton Act.

Keywords: Vertical mergers; double marginalization; input foreclosure; dominant firm and competitive fringe; raising rivals’ costs; non-predatory exit; antitrust policy (search for similar items in EconPapers)
JEL-codes: K21 L13 L41 L42 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:410

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