Ownership and Collusive Exit: Theory and a Case of Nuclear Phase-out

Matti Liski and Iivo Vehviläinen

July 2018

In a declining market each firm hopes others will exit first. Collusive cross-ownership removes this war of attrition: it achieves subgame-perfect collusive exit by giving a stake in the gains that follow from one’s exit and by taking a stake in one’s continuation gains. We show the result and apply it to the electricity sector where new technologies force incumbents to phase out capacity. An illustrative quantification for the Nordic nuclear industry shows how equity arrangements lead to a highly distorted phase-out, both for the consumer surplus and environment.

Keywords: Cross-ownership, Exit, War of Attrition, Electricity, Renewable Energy, Stranded Assets

JEL Classification: L51, L94, Q28, Q42, Q48