Virtual Capacity and Tacit Collusion
AbstractIn several European merger cases competition authorities have demanded that the merging firm auctions of 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 makes tacit collusion easier. The reason is that the auction price on virtual capacity increases, when the merging firm reduces production in order to increase the output price. This reduces its temptation to deviate.
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Bibliographic InfoPaper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2004-03.
Length: 23 pages
Date of creation: Dec 2004
Date of revision:
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More information through EDIRC
virtual capacity; tacit collusion; anti-trust; mergers; competition policy;
Find related papers by JEL classification:
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-01-02 (All new papers)
- NEP-COM-2005-01-02 (Industrial Competition)
- NEP-EEC-2005-01-02 (European Economics)
- NEP-EEC-2005-01-05 (European Economics)
- NEP-REG-2005-01-02 (Regulation)
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.:
- von der Fehr, Nils-Henrik Morch & Harbord, David, 1993.
"Spot Market Competition in the UK Electricity Industry,"
Royal Economic Society, vol. 103(418), pages 531-46, May.
- Von der Fehr, N.H.M. & Harbord, D., 1992. "Spot Market Competition in the UK Electricity Industry," Memorandum 09/1992, Oslo University, Department of Economics.
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