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The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan


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1935-1704
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Tacit Collusion in Capacity Investment: The Role of Capacity Exchanges

Christian Hogendorn1

1Wesleyan University,

Citation Information: The B.E. Journal of Theoretical Economics. Volume 7, Issue 1, ISSN (Online) 1935-1704, DOI: 10.2202/1935-1704.1306, July 2007

Publication History

Published Online:
2007-07-17

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.

Keywords: capacity investment; capacity exchanges; business to business exchanges; tacit collusion

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