Research Summary
Research Summary
Foreclosure with Incomplete Information
Description
In this paper we investigate the robustness of the widely-used new foreclosure doctrine and its associated welfare implications to the introduction of incomplete information. In particular, we make the realistic assumption that the upstream firm’s marginal cost is private information, unknown to the downstream firms. We find that this simple modification dramatically affects the “over-selling” result which characterises the previous literature. With incomplete information, high-cost firms will often “under-sell” in equilibrium, that is, supply less than their monopoly output. Low-cost firms continue to over-sell, so all types of firms have a reason to foreclose downstream, but only for low-cost types is this necessarily harmful. For high-cost types foreclosure can be Pareto-improving, resulting in higher output, profits and consumer surplus.
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