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Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns

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  • van Koten, Silvester
  • Ortmann, Andreas

Abstract

We experimentally study the effects of introducing a forward market and of increasing the number of competitors in a quantity-setting market under strictly convex production costs. Our key interest is to better understand which of these two remedies is more effective at enhancing competition. Allaz and Vila (1993) theorized that forward markets can have a pro-competitive effect under linear production costs. Le Coq and Orzen (2006) and Brandts et al. (2008) investigated this and related issues experimentally. All three experiments (including ours) support the prediction by Allaz and Vila (1993) that introducing a forward market does indeed intensify competition. The results of the present study, however, differ from previous experimental results in that we find the forward market to be the more effective remedy. Brandts et al. (2008) increase the number of competitors by entry, which thus increases the aggregate stock of production assets and makes output cheaper. In contrast, we increase the number of competitors by divestiture, which leaves the aggregate stock of production assets constant. Our results address an important policy issue and provide tentative evidence on the competition-enhancing effect of forward markets, which can be considered a behavioral remedy.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 64 (2013)
Issue (Month): C ()
Pages: 256-265

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Handle: RePEc:eee:eecrev:v:64:y:2013:i:c:p:256-265

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Web page: http://www.elsevier.com/locate/eer

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Keywords: European electricity markets; Economics experiments; Forward markets; Divestiture; Competition policy;

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References

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Citations

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Cited by:
  1. Silvester Van Koten & Andreas Ortmann, 2011. "Structural versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns," CERGE-EI Working Papers wp437, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  2. Silvester van Koten, 2014. "Do Emission Trading Schemes Facilitate Efficient Abatement Investments? An Experimental Study," CERGE-EI Working Papers wp503, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  3. Schubert, Jens, 2013. "The Impact of Forward Trading on Tacit Collusion: Experimental Evidence," MPRA Paper 43768, University Library of Munich, Germany.

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