Market foreclosure or vertical foreclosure, is the production limitation put on a producing organisation if either it is denied access to a supplier (''upstream foreclosure''), or it is denied access to a downstream buyer (''downstream foreclosure)''. A supplier or intermediary in a

supply chain A supply chain is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers, while supply chain management deals with the flow of goods in distri ...

could acquire this form of

market power In economics, market power refers to the ability of a theory of the firm, 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 othe ...

against competitors through means of

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...

. This amalgamation of suppliers and customers demonstrates

vertical integration In microeconomics, management and international political economy, vertical integration, also referred to as vertical consolidation, is an arrangement in which the supply chain of a company is integrated and owned by that company. Usually each ...

along a

value chain A value chain is a progression of activities that a business or firm performs in order to deliver goods and services of Value (economics), value to an end customer. The concept comes from the field of business management and was first described ...

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, a transaction cost is a cost incurred when making an economic trade when participating in a market. The idea that transactions form the basis of economic thinking was introduced by the institutional economist John R. Commons in 1 ...

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 (economics), 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 (economics) ...

. 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 a ...

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 Chicago is the List of municipalities in Illinois, most populous city in the U.S. state of Illinois and in the Midwestern United States. With a population of 2,746,388, as of the 2020 United States census, 2020 census, it is the List of Unite ...

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 * Second Ep ...

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