OPTION CONTRACTS AND VERTICAL FORECLOSURE

A model of vertical integration is studied. Upstream firms sell differ entiated inputs; downstream firms bundle them to make final products. Downstream products are sold as option contracts, which allow consumer s to choose from a set of commodities at predetermined prices. The mod el is illustrated by examples in telecommunication and health markets. Equilibria of the integration game must result in upstream input fore closure and downstream monopolization. Consumers may or may not benefi t from integration.