Title: Capacity, Technology Portfolios, and the Paradox of Concentration

Abstract: Does restricting the output capacity of the dominant firm invariably result in reduced prices? This study models competition among firms offering supply schedules that incorporate multiple technologies, each characterized by a constant marginal cost up to its specific capacity limit. Our analysis reveals that capacity constraints and technological efficiency function as independent sources of market power, carrying divergent policy consequences. Specifically, when the dominant firm’s market power stems from its technological efficiency, a modest reallocation of higher-cost capacity from competitors to the leader can increase market concentration while simultaneously driving down prices. This outcome defies conventional antitrust assumptions. However, substantial reallocations tend to increase prices, establishing a U-shaped correlation between price levels and market concentration. We demonstrate the existence and uniqueness of the equilibrium and generalize these findings to alternative oligopoly frameworks. Empirical evidence from Colombia’s wholesale electricity market, where weather-induced fluctuations shift hydropower capacity among firms with diverse technological profiles, corroborates this pattern. In the least concentrated markets, hypothetical transfers of capacity to the largest firm could reduce prices by as much as 30%. These findings have significant implications for the regulation of capacity caps, mandatory divestitures, and merger scrutiny.

Source: arXiv Generated at: 2026-06-04 00:00:00 UTC