Capacity, Technology Portfolios, and the Paradox of Concentration

Abstract

Does limiting the largest firm's capacity always lower prices? We model firms competing in supply schedules with multiple technologies, each with constant marginal cost up to capacity. In a tractable model, in which capacity and technological efficiency coexist as distinct sources of market power, we find that when the largest firm leads by efficiency, a small transfer of higher-cost capacity to the leader raises concentration yet lowers prices, contrary to standard antitrust intuition. Larger transfers raise prices, restoring standard intuition and tracing a non-monotone price-concentration relation. We prove existence and uniqueness of equilibrium, derive closed-form conditions for when transfers raise or lower prices, and extend the results to other oligopoly models. Evidence from Colombia's wholesale electricity market, where weather shocks shift hydropower capacity across technology-diversified firms, supports the pattern. Counterfactual transfers lower prices up to 30% in the least concentrated markets. We draw implications for capacity caps, divestitures, and mergers.