Foreclosure with Incomplete Information

Lucy White

No 3942, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We investigate the robustness of the new foreclosure doctrine and its associated welfare implications to the introduction of incomplete information. In particular, we let the upstream firm?s marginal cost be private information, unknown to the downstream firms. The previous literature has argued that vertical integration is harmful because it allows an upstream monopolist to limit output to monopoly levels, whereas a disintegrated structure will ?over-sell?, producing more in equilibrium. By contrast, we find that with incomplete information, high-cost firms will often ?under-sell? in equilibrium; that is, supply less than their monopoly output. Low-cost firms continue to over-sell, so all types of firms have a reason to integrate downstream, but this is socially harmful only for low-cost types. For high-cost firms vertical integration can be Pareto-improving, resulting in higher output, profits and consumer surplus.

Keywords: Foreclosure; Vertical integration; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D42 D82 L12 L42 (search for similar items in EconPapers)
Date: 2003-06
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP3942 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3942

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP3942

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().