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Vertically integrated firms' investments in electricity generating capacities

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  • Boom, Anette

Abstract

We compare investments in generating capacities of an integrated monopolist with the aggregate investments of two vertically integrated competing firms. The firms invest in their capacity and fix the retail price while electricity demand is uncertain. The wholesale price is determined in a unit price auction where the firms know the level of demand when they bid their capacities. Total capacities can be larger or smaller with a duopoly than with a monopoly. If the two firms select the Pareto dominant equilibrium, then the retail price is always higher and the social welfare lower in the duopoly case.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 4 (July)
Pages: 544-551

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Handle: RePEc:eee:indorg:v:27:y:2009:i:4:p:544-551

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Web page: http://www.elsevier.com/locate/inca/505551

Related research

Keywords: Capacity investments Vertical Integration Unit price auction Demand uncertainty Subgame perfect equilibria;

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  1. Von der Fehr, N.H.M. & Harbord, D., 1992. "Spot Market Competition in the UK Electricity Industry," Memorandum 09/1992, Oslo University, Department of Economics.
  2. Castro-Rodriguez, Fidel & Marín Uribe, Pedro Luis & Siotis, Georges, 2001. "Capacity Choices in Liberalized Electricity Markets," CEPR Discussion Papers 2998, C.E.P.R. Discussion Papers.
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Cited by:
  1. Zöttl, Gregor, 2011. "On optimal scarcity prices," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 589-605, September.
  2. Ruderer, D., 2012. "The Impact of Transmission Pricing in Network Industries," Cambridge Working Papers in Economics 1230, Faculty of Economics, University of Cambridge.
  3. Sakellaris, Kostis, 2010. "Modeling Electricity Markets as Two-Stage Capacity Constrained Price Competition Games under Uncertainty," MPRA Paper 23317, University Library of Munich, Germany.
  4. Léautier, Thomas-Olivier, 2011. "The Visible Hand: Ensuring Optimal Investment in Electric Power Generation," IDEI Working Papers 605, Institut d'Économie Industrielle (IDEI), Toulouse, revised Mar 2013.

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