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Optimal asset divestments with homogeneous products

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  • Federico, Giulio
  • López, Ángel L.

Abstract

We study alternative market power mitigation measures in a homogeneous goods industry where productive assets have asymmetric costs. We characterise the asset divestment by a dominant firm which achieves the greatest reduction in prices (taking the size of the divestment as given). The optimal divestment entails the sale of assets whose costs are close to the post-divestment price (i.e. they are price-setting). A divestment of this type can be several times more effective in reducing prices than divestments of low-cost assets. We also establish that virtual divestments (often employed in the power industry) are at best equivalent to low-cost divestments in terms of their impact on consumer welfare, and cannot replicate the optimal divestment.

Suggested Citation

  • Federico, Giulio & López, Ángel L., 2013. "Optimal asset divestments with homogeneous products," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 12-25.
  • Handle: RePEc:eee:indorg:v:31:y:2013:i:1:p:12-25
    DOI: 10.1016/j.ijindorg.2012.10.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Antitrust remedies; Contracts; Divestments; Electricity; Market power; Virtual Power Plants;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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