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Virtual Capacity and Tacit Collusion

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Author Info

  • Christian Schultz

    (Institute of Economics, University of Copenhagen)

Abstract

In 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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File URL: http://www.econ.ku.dk/cie/dp/dp_2003-2006/2004-03.pdf/
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2004-03.

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Length: 23 pages
Date of creation: Dec 2004
Date of revision:
Handle: RePEc:kud:kuieci:2004-03

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Keywords: virtual capacity; tacit collusion; anti-trust; mergers; competition policy;

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  1. 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.
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