How Market Fragmentation Can Facilitate Collusion

21 Pages Posted: 21 Oct 2006

See all articles by Kai-Uwe Kuhn

Kai-Uwe Kuhn

University of East Anglia (UEA) - Centre for Competition Policy; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2006

Abstract

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.

Keywords: Collusion, Market Fragmentation, Bertrand-Edgeworth competition, industry restructuring, deregulation

JEL Classification: J1, J11

Suggested Citation

Kuhn, Kai-Uwe, How Market Fragmentation Can Facilitate Collusion (October 2006). Available at SSRN: https://ssrn.com/abstract=939172 or http://dx.doi.org/10.2139/ssrn.939172

Kai-Uwe Kuhn (Contact Author)

University of East Anglia (UEA) - Centre for Competition Policy ( email )

UEA
Norwich Research Park
Norwich, Norfolk NR47TJ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
245
Abstract Views
1,668
rank
138,544
PlumX Metrics