Optimal asset divestments with homogeneous products

We study alternative market power mitigation measures in a homogeneous goods industry where productive assets have asymmetric costs. We characterise the asset divestment by a dominant firm 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 effective 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.

► We identify the most pro-competitive asset divestment by a dominant firm. ► It entails the sale of assets whose costs are close to the post-divestment price. ► It is much more effective in reducing prices than a low-cost divestment. ► Virtual divestments are at best equivalent to low-cost divestments.