Virtual Capacity and Competition

Christian Schultz (cs@econ.ku.dk)

No 1487, CESifo Working Paper Series from CESifo

Abstract: In several European merger cases competition authorities have demanded that the merging firm auctions off 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 leads to a less competitive outcome. The merging firm can build up a reputation for producing little, so that the output price increases in the market, and this increases the auction price on virtual capacity.

Keywords: virtual capacity; reputation; tacit collusion; antitrust; mergers; competition policy (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-com and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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