Market foreclosure and strategic aspects of vertical agreements

Abstract

This paper reviews the arguments about market foreclosure ─as an incentive for vertical agreements between upstream and downstream firms─ and its effects on welfare. We consider that downstream firms compete both in prices and quantities in the final good market and upstream firms compete in quantities in the intermediate good market. In this context we show that a vertical agreement must not contemplate market foreclosure, but upstream firm continues buying or selling input in intermediate market. To buy of to sell depends on the competition in final market and on the magnitude of mark-ups in both markets. Regarding antitrust policy, we show that even vertical agreements aimed at increasing input Price faced by other firms may be positive from the welfare viewpoint.