Exporting Collusion Under Capacity Constraints: an Anti-Competitive Effect of Market Integration

The paper examines the effects of interconnecting two (network) markets that previously were totally separated. In each market different capacity-constrained firms operate. Firms collude whenever it is rational for them to do so. We identify the maximum sustainable price in each of the two separate markets, as a function of the number of firms in the market, and of the vector of capacities. Interconnecting the two markets may bring about greater competition, but greater ability to collude as well. We establish conditions on the number of firms and on capacity constraints such that interconnection fosters collusion and decreases total welfare. In this case, the interconnection of two markets exports collusion, rather than exporting competition. Market integration does not always reduce the need to increase productive capacity.