What is Market Foreclosure?

Malcolm Tatum

Market foreclosure is a strategy in which one group of participants within a given market takes steps to limit the access of others to participation within that particular market. At times, the strategy may be implemented with the support of a local or national government, usually as a means of regulating trade during a difficult economic period. The exact scope of the limitations may focus on preventing certain types of buyers and sellers from connecting with one another, with the anticipated outcome being a stronger market.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

One of the ways in which market foreclosure occurs is by finding ways to limit the amount of competition that occurs between different participants within the marketplace. This can often be a tool used by participants who are in a position to manage the rate of vertical integration, owing to their placement within the supply chain itself. For example, a business that acts as an intermediary between manufacturers and consumers may be able to create an arrangement in which exclusive distribution rights for a given product are secured. When this occurs, the intermediary becomes the sole source of the product, making it possible to control the release of the product to the public. As a result, demand may exceed supply, allowing the intermediary to generate higher returns on sales than would have been possible if consumers had direct access to the manufacturer.

The idea of market foreclosure is often presented as exclusive dealing. With this approach, potential competitors are effectively barred from the marketplace, or reduced to only being able to serve a limited sector of that marketplace. This situation makes it difficult for competitors to increase market share and gradually expand the business operation. At the same time, a government may choose to utilize this process of exclusive dealing for a period of time as a way of stabilizing a market by limiting the amount of market share that any one business capture. When this is the case, the range of competitors is somewhat limited in the ability to take over the market and assume a controlling position within that market, effectively ensuring that consumers do have more options open to them.

Typically, a market foreclosure situation is not intended to last forever. When used by a government as a means of stabilizing an industry or a sector of the economy, the restrictions are often lifted once the desired result has been obtained. While it is possible to use market foreclosure as a means of creating a stranglehold on a market that excludes buyers and sellers alike, situations of this type are usually only sustainable for a limited period of time before steps are taken to compensate for the limitations and alternatives are made available once again.

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