Competitive foreclosure

We present a model where oligopolistic Örms producing substitutes compete for inputs in a decentralized market. Input suppliers are capacity constrained(or produce under exclusivity). Compared to a price-taking input market, the incentive to foreclose downstream competitors not only leads to higher input prices, but it also results in a higher aggregate amount of input acquired. This novel feature mitigates the output reducing effect of downstream market power and may even restore efficiency in the unique (input)market clearing equilibrium. Other equilibria where Örms endogenously coordinate on which suppliers to target result in excess input supply (involuntary unemployment, if input is labor) and even higher input prices. Our insights generalize to alternative vertical structures. JEL Codes: D43, L11, L13