Market foreclosure

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Market foreclosure, also called vertical foreclosure, happens when a producer is blocked from getting needed inputs from suppliers (upstream foreclosure) or from selling its products to buyers (downstream foreclosure). This can occur when companies merge and become vertically integrated, controling both sides of the supply chain.

Vertical integration can bring benefits, such as lower costs and fewer price markups along the chain, but it can also raise barriers for competitors.

In the TV industry, integrated operators sometimes try to deter rival programs by making it harder for them to enter the market. By controlling production and distribution, they reduce transaction costs and gain an edge, which can limit competition.

In gasoline, large refineries with strong production power can influence the market. Studies estimate that vertically integrated players can nudge US wholesale gasoline prices up by about 0.2 to 0.6 cents per gallon.

However, foreclosure is not guaranteed. In the cement and concrete industries, over about 34 years, vertical integration often led to lower prices and more output due to production efficiencies rather than foreclosing the market. In Chicago’s beer market, exclusive dealing did not always reduce sales; some research found beer sales remained steady even with exclusive arrangements.

Bottom line: vertical integration can lead to market foreclosure, but its effects vary by industry and context. It can also improve efficiency and lower prices in some cases.