Vertical foreclosure with the choice of input specifications

We develop an equilibrium model of vertical foreclosure with the choice of input specifications. Vertical foreclosure occurs as the upstream division of the integrated firm makes a specialized input for its sister downstream division while it would, as an independent firm, provide a generalized inpu t. The changes in incentives with vertical integration can be explained by the externalities the choice of a specialized input entails; vertical integ ration allows the upstream firm to internalize the benefit of raising the r ival firm's costs at the downstream level. We derive conditions for equilib rium vertical foreclosure to occur and discuss its welfare consequences.