Vertical Foreclosure versus Downstream Competition with Capital Precommitment

Abstract

The recent literature on vertical foreclosure suggests that vertical integration can have the anticompetitive effect of enabling an upstream firm to commit to restricting output to downstream firms at the monopoly level. We allow the upstream firm to make an ex-ante capital precommitment. We show that, if integration is outlawed, the upstream firm will distort capital downward as an alternative device to restrict output. We show that this alternative may be socially less efficient than vertical integration.