Vertical unbundling, the coordination of investment, and network pricing
AbstractThis paper provides a formal analysis on the investment coordination problem in a vertically separated electricity supply industry, although the analysis may apply also to other network industries. In an electricity system, the investment decisions of network and power plants need to be coordinated. In unbundled markets, firm-internal coordination no longer applies. We develop a formal approach to examine whether simple information exchange (“cheap talk”) could restore coordination. We adopt a three-stage profit-optimized investment model, with a (regulated) monopoly network and two asymmetrical Cournot-type generators. To analyse credibility of cheap talk we apply the concept of self-signalling in a game with incomplete information and positive spillovers. We show that cheap talk cannot generally solve the investment coordination problem and as a result separation may actually cause a costly coordination problem. We then examine locational network pricing as a coordination device to internalize the incentive problem.
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Bibliographic InfoPaper provided by Bremer Energie Institut in its series Bremen Energy Working Papers with number 0003.
Length: 32 pages
Date of creation: Aug 2010
Date of revision:
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Web page: http://www.bremer-energie-institut.de/
cheap talk; unbundling; game theory; network; investment; coordination;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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