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Virtual Capacity and Tacit Collusion

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Author Info
Christian Schultz (Institute of Economics, University of Copenhagen)

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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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Publisher 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
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Handle: RePEc:kud:kuieci:2004-03

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Related research
Keywords: 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

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  1. 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)
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  2. 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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  3. Natalia Fabra & Juan Toro, 2002. "Price Wars and Collusion in the Spanish Electricity Market," Industrial Organization 0212001, EconWPA, revised 31 Aug 2003. [Downloadable!]
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  4. 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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