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How Market Fragmentation Can Facilitate Collusion

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  • Kühn, Kai-Uwe

Abstract

When regulated markets are liberalized, economists always stress the benefits of fragmenting existing capacities among more firms. This is because oligopoly models typically imply that a larger number of firms generates stronger competition. I show in this paper that this intuition may fail under collusion. When individual firms are capacity constrained relative to total demand, the fragmentation of capacity facilitates collusion and increases the highest sustainable collusive price. This result can explain the finding in Sweeting (2005) that dramatic fragmentation of generation capacity in the English electricity industry led to increasing price cost margins.

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  • Kühn, Kai-Uwe, 2006. "How Market Fragmentation Can Facilitate Collusion," CEPR Discussion Papers 5948, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5948
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    References listed on IDEAS

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    More about this item

    Keywords

    Bertrand-Edgeworth competition; collusion; industry restructuring; market fragmentation;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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