New Models of Foreclosure: Should Antitrust Authorities Be Concerned?

Abstract

Recent models which claim to provide examples of profitable foreclosure--when a firm weakens competition by reducing its access to customers or inputs--have led to calls for more aggressive antitrust activity by courts and regulators. However, we show that the alleged anticompetitive behavior of these models is either typical of competition or simply implausible. In addition, even if foreclosure occurs, it is almost always confined to the short run, and its efficiency consequences are commonly ambiguous. As a result, the new literature on foreclosure provides little impetus for intervention by poorly informed regulators.

In most of the models examined, the "foreclosing" firm earns profits equal to its cost advantage as is typical of Bertrand competition, or makes profits because it was an early investor/innovator. Such profits can hardly be considered anticompetitive, and in any case can rarely be maintained beyond the short run. In addition, in many of these models vertical coordination increases efficiency, so even if foreclosure occurs, overall efficiency could improve. In the remaining models foreclosure obtains because the incumbent, but not entrants, can coordinate buyers. Only allowing incumbents this privilege is implausible, except perhaps in the short term.

JEL Classification: L41, L42, K21