Vertical foreclosure in experimental markets

We report the results of experiments designed to test recent theories of ve rtical foreclosure. Consistent with the theory, vertical integration improv es the upstream firm's ability to commit to restricting output to the monop oly level, as does the use of public contracts. Public contracts are not a perfect substitute for vertical integration, however. integration allows mo re surplus to be extracted from the unintegrated downstream firm, a bargain ing effect that has been underemphasized in the recent foreclosure literatu re. Motivated by some observations that are difficult to reconcile with exi sting theory, we extend the theory to allow downstream firms to have hetero geneous (rather than purely passive or symmetric) out-of-equilibrium belief s.