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Incentives for merger in a noncompetitive permit market

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    Abstract

    A group of small competitive permits traders facing an imperfectly competitive permit market may consider cooperation (merger) to act strategically in the permit market. It is a well-known result in the literature that the horizontal merger of Cournot players may be unprofitable because of the response of nonmerging agents (a negative strategic effect). We show that the strategic effect of a merger among competitive agents substantially differs from the strategic effect of a merger among Cournot players. Furthermore, we show how the profitability of a merger depends on whether the merged agents are on the same side of the market as the preexisting dominant agent(s). These results show how the expected competitive environment in the permit market may determine how potentially large traders such as the US, and group of small, competitive traders, such as the EU countries, organize their permit trade in any follow-up agreement to the Kyoto protocol.

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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 568.

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    Date of creation: Dec 2008
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    Handle: RePEc:ssb:dispap:568

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    Keywords: Emission permits; strategic permit trading; mergers; climate agreement; market power.;

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    1. Ramón Faulí-Oller, 1997. "On merger profitability in a cournot setting," Working Papers. Serie AD 1997-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers 402, California Institute of Technology, Division of the Humanities and Social Sciences.
    3. Hagem, Cathrine & Westskog, Hege, 1998. "The Design of a Dynamic Tradeable Quota System under Market Imperfections," Journal of Environmental Economics and Management, Elsevier, vol. 36(1), pages 89-107, July.
    4. Huck, Steffen & Konrad, Kai A., 2001. "Merger profitability and trade policy," Discussion Papers, Research Unit: Market Processes and Governance FS IV 01-12, Social Science Research Center Berlin (WZB).
    5. Michael Finus & Ekko Ierland & Rob Dellink, 2006. "Stability of Climate Coalitions in a Cartel Formation Game," Economics of Governance, Springer, vol. 7(3), pages 271-291, August.
    6. Lasse Ringius & Asbjørn Torvanger & Arild Underdal, 2002. "Burden Sharing and Fairness Principles in International Climate Policy," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 2(1), pages 1-22, March.
    7. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
    8. Fauli-Oller, Ramon, 1997. "On merger profitability in a Cournot setting," Economics Letters, Elsevier, vol. 54(1), pages 75-79, January.
    9. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
    10. Cathrine Hagem & Steffen Kallbekken & Ottar Mæstad & Hege Westskog, 2006. "Market Power with Interdependent Demand: Sale of Emission Permits and Natural Gas from Russia," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(2), pages 211-227, 06.
    11. Christoph Bohringer, 2002. "Climate Politics from Kyoto to Bonn: From Little to Nothing?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 51-71.
    12. Cathrine Hagem & Hege Westskog, 2008. "Intertemporal Emission Trading with a Dominant Agent: How does a Restriction on Borrowing Affect Efficiency?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 40(2), pages 217-232, June.
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