Virtual Capacity and Tacit Collusion

Christian Schultz ()

No 2004-03, CIE Discussion Papers from University of Copenhagen. Department of Economics. Centre for Industrial Economics

Abstract: In several European merger cases competition authorities have demanded that the merging firm auctions of virtual capacity. The buyer of virtual capacity receives an option on an amount of output at a pre-specified price, typically equal to marginal cost. This output is sold in the market in competition with the merging firm. The paper compares sale of physical and virtual capacity by the merging firm and shows that virtual capacity makes tacit collusion easier. The reason is that the auction price on virtual capacity increases, when the merging firm reduces production in order to increase the output price. This reduces its temptation to deviate.

Keywords: virtual capacity; tacit collusion; anti-trust; mergers; competition policy (search for similar items in EconPapers)
JEL-codes: D44 L40 L41 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2004-12
New Economics Papers: this item is included in nep-com, nep-eec and nep-reg
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