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 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 powe ...
against competitors through means of
mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
. 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 suppl ...
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 fir ...
with various strategic and efficiency benefits including elimination of successive
monopoly markups 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 ...
s.
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. 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 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
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beer market found evidence that contradicts the effects that is market foreclosure stemming from vertical integration. Research by
John Asker 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
See also
*
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 suppl ...
*
Exclusive dealing
In Economics and Law, exclusive dealing arises when a supplier entails the buyer by placing limitations on the rights of the buyer to choose what, who and where they deal. This is against the law in most countries which include the USA, Austra ...
*
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 fir ...
*
Barriers to entry
References
{{Reflist
Anti-competitive practices
Imperfect competition