How Market Fragmentation Can Facilitate Collusion

23 Pages Posted: 3 Jan 2007

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)

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Date Written: November 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: Market fragmentation, collusion, Bertrand-Edgeworth competition, industry restructuring

JEL Classification: J1, J11

Suggested Citation

Kuhn, Kai-Uwe, How Market Fragmentation Can Facilitate Collusion (November 2006). CEPR Discussion Paper No. 5948, Available at SSRN: https://ssrn.com/abstract=954710

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

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