A term-of-art used in competition/antitrust economic and market analysis, especially mergers with a vertical component and conglomerate mergers. Foreclosure may happen when a merger or transaction denies competitors access to an essential facility, such as a component or input supplier (upstream foreclosure) or a crucial market (downstream foreclosure.) In addition, where an entity finds ways, typically be acquisition to acquire or control part of the upstream or downstream market, by for example reducing upstream supplier to 3 from 4, the natural tendency of its competitors is to try to follow suit, buying one of the remaining upstream suppliers.
One of the concerns of foreclosure is that it may deter or curtail market entry by new competitors, since they might need access to the foreclosed facility and can no longer get it. In this way it can ensconce a business in the market and allow it to slowly raise prices. Historically, economic analysis in merger control has not often considered foreclosure effects, because the prevailing economic theory was sanguine and relaxed about vertical restrains, focussing instead on cartels and horizontal mergers. Moreover, the economic metric typically applied was the Herfindahl-Hirschman Index, HHI and since in a vertical merger the entities merging are/were not in the same market, the HHI would not be changed by the transaction, even when the upstream or downstream party has a very large market share. Recently though, the US-DoJ’s Antitrust Division and Federal Trade Commission and the European Commission have indicated in guidelines that they intend to look at foreclosure as a key issue when reviewing vertical restraints.