Vertical foreclosure: a policy framework

Michiel Bijlsma, Viktoria Kocsis, Victoria Shestalova and Gijsbert Zwart

No 157, CPB Document from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: Whenever you phone your mother, switch on the light, or buy health insurance you purchase a service or product from a chain of vertically related industries. Providers of these products or services need access to a telecommunications network, an electricity network or to health care services. 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.

JEL-codes: L13 L42 L51 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-com, nep-mic and nep-net
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Citations: View citations in EconPapers (8)

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