Optimal Asset Divestments with Homogeneous Products

Abstract

We study alternative market power mitigation measures in a homogenous goods industry where productive assets have asymmetric costs. We characterise the asset divestment by a dominant fi…rm which achieves the greatest reduction in prices (taking the size of the divestment as given). The optimal divestment entails the sale of assets whose costs are close to the post-divestment price (i.e. they are price-setting). A divestment of this type can be several times more e¤ective in reducing prices than divestments of low-cost assets. We also establish that virtual divestments (often employed in the power industry) are at best equivalent to low-cost divestments in terms of their impact on consumer welfare, and cannot replicate the optimal divestment.

Keywords: divestments, virtual power plants, contracts, market power, electricity, antitrust remedies

JEL Classification: D42, L13, L4, L94