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Virtual Capacity and Competition

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  • Christian Schultz

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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2005/wp-cesifo-2005-06/cesifo1_wp1487.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1487.

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

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Related research

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

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References

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  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, Elsevier, vol. 7(1), pages 47-70, March.
  2. Natalia Fabra & Juan Toro, 2001. "Price Wars and Collusion in the Spanish Electricity Market," Economic Working Papers at Centro de Estudios Andaluces E2001/05, Centro de Estudios Andaluces.
  3. D. Fudenberg & D. M. Kreps & E. Maskin, 1998. "Repeated Games with Long-run and Short-run Players," Levine's Working Paper Archive 608, David K. Levine.
  4. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 929-53, October.
  5. Severin Borenstein & James Bushnell, 1998. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," NBER Working Papers 6463, National Bureau of Economic Research, Inc.
  6. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 103(418), pages 531-46, May.
  7. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 805-826, September.
  8. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, Econometric Society, vol. 56(2), pages 383-96, March.
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Citations

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Cited by:
  1. Lawrence M. Ausubel & Peter Cramton, 2009. "Virtual Power Plant Auctions," Papers of Peter Cramton 09vpp, University of Maryland, Department of Economics - Peter Cramton, revised 2009.
  2. Martin Gonzalez Eiras & Dirk Niepelt, 2004. "Sustaining Social Security," Working Papers, Universidad de San Andres, Departamento de Economia 72, Universidad de San Andres, Departamento de Economia, revised Jun 2004.
  3. Höffler, Felix & Kranz, Sebastian, 2010. "Using Forward Contracts to Reduce Regulatory Capture," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 320, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Federico, Giulio & Lopez, Angel L., 2009. "Divesting power," IESE Research Papers, IESE Business School D/812, IESE Business School.
  5. de Frutos, Maria-Angeles & Fabra, Natalia, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6756, C.E.P.R. Discussion Papers.

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