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Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets

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  • James B. Bushnell
  • Erin T. Mansur
  • Celeste Saravia

Abstract

This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure. (JEL L11, L13, L94)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 1 (March)
Pages: 237-66

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:237-66

Note: DOI: 10.1257/aer.98.1.237
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  1. Green, Richard & Newbery, David M G, 1991. "Competition in the British Electricity Spot Market," CEPR Discussion Papers 557, C.E.P.R. Discussion Papers.
  2. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  3. Borenstein, Severin & Bushnell, James & Kahn, Edward & Stoft, Steven, 1995. "Market power in California electricity markets," Utilities Policy, Elsevier, vol. 5(3-4), pages 219-236.
  4. Severin Borenstein & James Bushnell & Christopher R. Knittel, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 65-88.
  5. Steven L. Puller, 2007. "Pricing and Firm Conduct in California's Deregulated Electricity Market," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 75-87, February.
  6. Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 1-39.
  7. Richard Schmalensee & Bennett W. Golub, 1984. "Estimating Effective Concentration in Deregulated Wholesale Electricity Markets," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 12-26, Spring.
  8. Liski, Matti & Montero, Juan-Pablo, 2006. "Forward trading and collusion in oligopoly," Journal of Economic Theory, Elsevier, vol. 131(1), pages 212-230, November.
  9. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
  10. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
  11. Erin T. Mansur, 2008. "Measuring Welfare in Restructured Electricity Markets," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 369-386, May.
  12. Natalia Fabra & Juan Toro, 2001. "Price Wars and Collusion in the Spanish Electricity Market," Economic Working Papers at Centro de Estudios Andaluces E2001/05, Centro de Estudios Andaluces.
  13. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  14. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
  15. Joskow, P.L., 2003. "The Difficult Transition to Competitive Electricity Markets in the U.S," Cambridge Working Papers in Economics 0328, Faculty of Economics, University of Cambridge.
  16. Mansur, Erin T, 2007. "Upstream Competition and Vertical Integration in Electricity Markets," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 125-56, February.
  17. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers 31547, Iowa State University, Department of Economics.
  18. James Bushnell, 2007. "Oligopoly equilibria in electricity contract markets," Journal of Regulatory Economics, Springer, vol. 32(3), pages 225-245, December.
  19. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
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  21. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
  22. Bushnell, James, 2004. "California's electricity crisis: a market apart?," Energy Policy, Elsevier, vol. 32(9), pages 1045-1052, June.
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  24. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
  25. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, September.
  26. Krattenmaker, Thomas G & Salop, Steven C, 1986. "Competition and Cooperation in the Market for Exclusionary Rights," American Economic Review, American Economic Association, vol. 76(2), pages 109-13, May.
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