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Tacit Collusion in Capacity Investment: The Role of Capacity Exchanges

  • Christiaan Hogendorn


    (Economics Department, Wesleyan University)

In many capacity-intensive industries (e.g. electricity, bandwidth), exchanges allow firms to buy and sell wholesale capacity before selling on the retail market. This allows firms to smooth demand shocks, but it also raises suspicions that exchanges 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.

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Paper provided by Wesleyan University, Department of Economics in its series Wesleyan Economics Working Papers with number 2006-002.

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Length: 22 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:wes:weswpa:2006-002
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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. Kai-Uwe Kühn, 2001. "Fighting collusion by regulating communication between firms," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 167-204, 04.
  3. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
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