How Market Fragmentation Can Facilitate Collusion
University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. 5948
When regulated markets are liberalized, economists always stress the benefits of fragmenting existing capacities among more firms. This is because oligopoly models typically imply that a larger number of firms generates stronger competition. I show in this paper that this intuition may fail under collusion. When individual firms are capacity constrained relative to total demand, the fragmentation of capacity facilitates collusion and increases the highest sustainable collusive price. This result can explain the finding in Sweeting (2005) that dramatic fragmentation of generation capacity in the English electricity industry led to increasing price cost margins.
Number of Pages in PDF File: 23
Keywords: Market fragmentation, collusion, Bertrand-Edgeworth competition, industry restructuring
JEL Classification: J1, J11working papers series
Date posted: January 3, 2007
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