Safe harbor input prices and market exclusion

An essential input price that is “too high” relative to the downstream price leads to inefficient foreclosure and one that is “too low” induces the vertically-integrated firm to engage in non-price discrimination. Displacement ratios are used to derive the range of safe harbor (downstream/upstream) margin ratios within which no market exclusion arises in equilibrium. The range of admissible margin ratios is increasing in the degree of product differentiation and reduces to a single ratio in the limit as the products become homogeneous. A key policy finding is that complementary price-ceiling and price-floor constraints can prevent both forms of market exclusion. Copyright Springer Science+Business Media New York 2014