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Virtual Capacity and Competition

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Author Info
Christian Schultz ()

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Abstract

In 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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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1487.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1487

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Related research
Keywords: virtual capacity; reputation; tacit collusion; antitrust; mergers; competition policy;

Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Selten, Reinhard & Stoecker, Rolf, 1986. "End behavior in sequences of finite Prisoner's Dilemma supergames A learning theory approach," Journal of Economic Behavior & Organization, Elsevier, vol. 7(1), pages 47-70, March. [Downloadable!] (restricted)
  2. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March. [Downloadable!] (restricted)
  3. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-46, May. [Downloadable!] (restricted)
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  4. Natalia Fabra & Juan Toro, 2002. "Price Wars and Collusion in the Spanish Electricity Market," Industrial Organization 0212001, EconWPA, revised 31 Aug 2003. [Downloadable!]
    Other versions:
  5. Borenstein, Severin & Bushnell, James, 1999. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," Journal of Industrial Economics, Blackwell Publishing, vol. 47(3), pages 285-323, September. [Downloadable!] (restricted)
    Other versions:
  6. Fudenberg, Drew & Kreps, David M & Maskin, Eric S, 1990. "Repeated Games with Long-run and Short-run Players," Review of Economic Studies, Blackwell Publishing, vol. 57(4), pages 555-73, October. [Downloadable!] (restricted)
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  7. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. de Frutos, Maria-Angeles & Fabra, Natalia, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers 6756, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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