Tacit Collusion in Capacity Investment: The Role of Capacity Exchanges
AbstractIn many capacity-intensive industries (e.g. electricity, bandwidth), exchanges allow firms, including competitors, to buy and sell wholesale capacity before selling on the retail market. Capacity exchanges allow firms to smooth demand shocks, but do they also facilitate tacit collusion to limit capacity investment? This paper models investment and exchange in a one-shot game and in a repeated game with tacit collusion. It finds that the presence of the exchange does not reduce total capacity investment, and thus does not raise consumer prices. In fact, the exchange may make it more difficult to sustain tacit collusion.
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Bibliographic InfoArticle provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.
Volume (Year): 7 (2007)
Issue (Month): 1 (July)
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Web page: http://www.degruyter.com
Other versions of this item:
- Christiaan Hogendorn, 2006. "Tacit Collusion in Capacity Investment: The Role of Capacity Exchanges," Wesleyan Economics Working Papers 2006-002, Wesleyan University, Department of Economics.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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