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Tacit Collusion in Capacity Investment: The Role of Capacity Exchanges

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  • Hogendorn Christian

    (Wesleyan University)

Abstract

In many capacity-intensive industries (e.g. electricity, bandwidth), exchanges allow firms, including competitors, to buy and sell wholesale capacity before selling on the retail market. Capacity exchanges allow firms to smooth demand shocks, but do they also facilitate tacit collusion to limit capacity investment? This paper models investment and exchange in a one-shot game and in a repeated game with tacit collusion. It finds that the presence of the exchange does not reduce total capacity investment, and thus does not raise consumer prices. In fact, the exchange may make it more difficult to sustain tacit collusion.

Suggested Citation

  • Hogendorn Christian, 2007. "Tacit Collusion in Capacity Investment: The Role of Capacity Exchanges," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-16, July.
  • Handle: RePEc:bpj:bejtec:v:7:y:2007:i:1:n:25
    DOI: 10.2202/1935-1704.1306
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    References listed on IDEAS

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    1. Stenbacka, Rune, 1994. "Financial structure and tacit collusion with repeated oligopoly competition," Journal of Economic Behavior & Organization, Elsevier, vol. 25(2), pages 281-292, October.
    2. James W. Friedman, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 1-12.
    3. David Lucking-Reiley & Daniel F. Spulber, 2001. "Business-to-Business Electronic Commerce," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 55-68, Winter.
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    Cited by:

    1. Young David, 2010. "Endogenous Investment and Pricing under Uncertainty," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-29, January.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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