A BEJTE Topics article.

Abstract

In many capacity-intensive industries (e.g. electricity, bandwidth), exchanges allow firms, including competitors, to buy and sell wholesale capacity before selling on the retail market. Capacity exchanges allow firms to smooth demand shocks, but do they also facilitate tacit collusion to limit capacity investment? This paper models investment and exchange in a one-shot game and in a repeated game with tacit collusion. It finds that the presence of the exchange does not reduce total capacity investment, and thus does not raise consumer prices. In fact, the exchange may make it more difficult to sustain tacit collusion.

Submitted: April 26, 2006 · Accepted: July 5, 2007 · Published: July 17, 2007

Recommended Citation

Hogendorn, Christian (2007) "Tacit Collusion in Capacity Investment: The Role of Capacity Exchanges," The B.E. Journal of Theoretical Economics: Vol. 7 : Iss. 1 (Topics), Article 25.
Available at: http://www.bepress.com/bejte/vol7/iss1/art25