Virtual Capacity and Competition

29 Pages Posted: 21 Jul 2005

See all articles by Christian Schultz

Christian Schultz

University of Copenhagen - Department of Economics; Centre for Industrial Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 2005

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

JEL Classification: L40, L41, D44

Suggested Citation

Schultz, Christian, Virtual Capacity and Competition (June 2005). CESifo Working Paper Series No. 1487, Available at SSRN: https://ssrn.com/abstract=759426 or http://dx.doi.org/10.2139/ssrn.759426

Christian Schultz (Contact Author)

University of Copenhagen - Department of Economics ( email )

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HOME PAGE: http://www.econ.ku.dk/cschultz/

Centre for Industrial Economics ( email )

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Copenhagen K., DK-1353
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CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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