Virtual Capacity and Competition
AbstractIn several European merger cases competition authorities have demanded that the merging firm auctions off virtual capacity. The buyer of virtual capacity receives an option on an amount of output at a pre-specified price, typically equal to marginal cost. This output is sold in the market in competition with the merging firm. The paper compares sale of physical and virtual capacity by the merging firm and shows that virtual capacity leads to a less competitive outcome. The merging firm can build up a reputation for producing little, so that the output price increases in the market, and this increases the auction price on virtual capacity.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1487.
Date of creation: 2005
Date of revision:
virtual capacity; reputation; tacit collusion; antitrust; mergers; competition policy;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-08-14 (All new papers)
- NEP-COM-2005-08-17 (Industrial Competition)
- NEP-MIC-2005-08-15 (Microeconomics)
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