Market foreclosure or vertical foreclosure, is the production limitation put on a producing organisation if either it is denied access to a

supplier Supplier may refer to: *Manufacturer, uses tools and labour to make things for sale * Processor (manufacturing), converts a product from one form to another *Packager (manufacturing), encloses products for distribution, storage, sale, and use *Dist ...

(''upstream foreclosure''), or it is denied access to a downstream buyer (''downstream foreclosure)''. A supplier or intermediary in a

supply chain In commerce, a supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products to customers through a distribution system. It refers to the network of organizations, people, activ ...

could acquire this form of

market power In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market pow ...

against competitors through means of mergers and acquisitions. This amalgamation of suppliers and customers demonstrates

vertical integration In microeconomics, management and international political economy, vertical integration is a term that describes the arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the supply ...

along a

value chain A value chain is a progression of activities that a firm operating in a specific industry performs in order to deliver a valuable product (i.e., good and/or service) to the end customer. The concept comes through business management and was firs ...

with various strategic and efficiency benefits including elimination of successive

monopoly markup A markup rule is the pricing practice of a producer with market power, where a firm charges a fixed mark-up over its marginal cost.Roger LeRoy Miller, ''Intermediate Microeconomics Theory Issues Applications, Third Edition'', New York: McGraw-Hill ...

s and lowering

transaction cost In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike pro ...

Examples

The television industry allows for certain insight when considering vertical integration due to the level of differentiating aspects the market provides. Within this industry, media markets have experienced various occasions in which integrated operators attempt to deter rival program services by means of increasing

barriers to entry In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or h ...

. Transaction costs being one of these barriers, plays an overwhelming role, effectively guaranteeing networks that have vertically integrated the upper hand in the market due to ability of self production while simultaneously excluding rival program services. Gasoline production provides another example of supply restraints and competitive dominance by means of vertical integration. Market foreclosure plays a consistent role in the dynamics of the gasoline industry and more specifically with large

refineries A refinery is a production facility composed of a group of chemical engineering unit processes and unit operations refining certain materials or converting raw material into products of value. Types of refineries Different types of refineries ...

with significant capabilities of production. Researchers have estimated that US wholesale gasoline prices have been raised by 0.2 to 0.6 cents per gallon due to the market power wielded by vertically integrated players in the industry.

Vertical integration without market foreclosure

Although generally the trend with vertical integration, the outcome does not always end in a foreclosed market. Researchers reviewing plant and market data in the US cement and concrete industries over a 34-year span, found that vertical integration led to lower prices and higher quantities for consumers. Presumably, this was because of production efficiencies from integration which proved contrary to what one would otherwise expect in a market experiencing foreclosure. Similarly, a review of exclusive dealing practices in the

Chicago (''City in a Garden''); I Will , image_map = , map_caption = Interactive Map of Chicago , coordinates = , coordinates_footnotes = , subdivision_type = List of sovereign states, Count ...

beer market found evidence that contradicts the effects that is market foreclosure stemming from vertical integration. Research by

John Asker John is a common English name and surname: * John (given name) * John (surname) John may also refer to: New Testament Works * Gospel of John, a title often shortened to John * First Epistle of John, often shortened to 1 John * Seco ...

conveyed evidence, not unlike the cement and concrete industries; that beer sales weren't diminishing for exclusive markets relative to non-exclusive markets.John Asker
Diagnosing Foreclosure due to Exclusive Dealing
September 2015

References

{{Reflist Anti-competitive practices Imperfect competition

Examples

Vertical integration without market foreclosure

See also

References