Question

Do firms that are affected by network externalities have a greater or lesser incentive to use vertical foreclosure? Does it matter if the firms have compatible networks or not?

Answer 1

The vertical foreclosure, also known as market foreclosure refers to the limitation on is the production that is put on a producing company when either it is denied access to a downstream buyer or it is denied access to a supplier. In the presence of network externalities, more individuals are likely to use the product, and could gain more utility from purchasing the product. When weaker upstream competition, the incentives will be stronger to vertically foreclose on downstream competition. Thus when there are network effects the incentive for foreclose would be even higher. When firms choose for competing with compatible goods; then consumers gains the full network benefits even when they do not buy all from the same firm.