Capacity, Technology Portfolios, and the Paradox of Concentration

Michele Fioretti, Junnan He and Jorge Tamayo

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Abstract: Does limiting the largest firm's capacity always lower prices? We model firms competing in supply schedules with multiple technologies, each defined by a constant marginal cost up to capacity. We show that capacity and technological efficiency coexist as distinct sources of market power, with opposite policy implications. When efficiency drives the market power of the largest firm, a small transfer of higher-cost capacity from rivals to the leader raises concentration yet lowers prices, contrary to standard antitrust intuition. Large transfers raise prices, tracing a U-shaped relation between prices and concentration. We prove existence and uniqueness of equilibrium, and extend the results to other oligopoly models. Evidence from Colombia's wholesale electricity market, where weather shocks shift hydropower capacity across technology-diversified firms, supports the pattern. Counterfactual transfers to the largest firm lower prices by up to 30% in the least concentrated markets. We draw implications for capacity caps, divestitures, and merger review.

Date: 2024-07, Revised 2026-06
New Economics Papers: this item is included in nep-bec, nep-com, nep-ene, nep-env, nep-ind and nep-reg
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