Optimal asset divestments with homogeneous products

Giulio Federico and Ángel L. López

International Journal of Industrial Organization, 2013, vol. 31, issue 1, 12-25

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.

Keywords: Antitrust remedies; Contracts; Divestments; Electricity; Market power; Virtual Power Plants (search for similar items in EconPapers)
JEL-codes: D42 L13 L40 L94 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:31:y:2013:i:1:p:12-25

DOI: 10.1016/j.ijindorg.2012.10.004

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