Capacity constraints, mergers and collusion

• Published in: European economic review 2002, Vol.46 (1), p.1-29
• Main Authors: Compte, Olivier, Jenny, Frédéric, Rey, Patrick
• Format: Article
• Language: English
• Subjects: Acquisitions & mergers; Capacity constraints; Collusion; Competition; Competition policy; Data analysis; Economic models; Economics; Enterprises; Mergers; Statistical analysis; Studies
• ISSN: 0014-2921; 1873-572X
• DOI: 10.1016/S0014-2921(01)00099-X

The objective of this paper is two-fold: to contribute to the analysis of tacit collusion in Bertrand supergames with (asymmetric) capacity constraints and, from a more applied perspective, to bring a new light on merger analysis and provide useful guidelines for competition policy, taking into account dynamic aspects of competition. It is well-known that capacity constraints affect tacit collusion, as they limit both incentives to deviate (e.g., to undercut rivals) and retaliation possibilities. However, most studies have so far focused on symmetric situations, where all firms have the same capacity, which leads to ambiguous and unintuitive results and also considerably limits the scope of application. Studying asymmetric situations makes it possible to analyse the impact of changes in the distribution of these capacities (expansions, but also mergers, split-offs, transfers, etc.) and to provide guidelines for competition policy and particularly for merger policy. These guidelines, which differ substantially from those inspired by more static analyses, such as the Herfindahl or other standard concentration tests, are applied to a famous merger that took place in the French bottled water market, the Nestlé–Perrier merger case.