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Competitions with Forward Contracts: A Laboratory Analysis Motivated by Electricity Market Design

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  • Jordi Brandts
  • Paul Pezanis-Christou
  • Arthur Schram

Abstract

We use experiments to study the efficiency effects for a market as a whole of adding the possibility of forward contracting to a pre-existing spot market. We deal separately with the cases where spot market competition is in quantities and where it is in supply functions. In both cases we compare the effect of adding a contract market with the introduction of an additional competitor, changing the market structure from a triopoly to a quadropoly. We find that, as theory suggests, for both types of competition the introduction of a forward market significantly lowers prices. The combination of supply function competition with a forward market leads to high efficiency levels.

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File URL: http://research.barcelonagse.eu/tmp/working_papers/66.pdf
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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 66.

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Date of creation: Oct 2003
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Handle: RePEc:bge:wpaper:66

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Keywords: electricity markets; forward Markets; experiments; competition;

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References

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  1. Newbery, David M., 2002. "Problems of liberalising the electricity industry," European Economic Review, Elsevier, vol. 46(4-5), pages 919-927, May.
  2. Bolle, Friedel, 2001. "Competition with supply and demand functions," Energy Economics, Elsevier, vol. 23(3), pages 253-277, May.
  3. Le Coq, Chloe & Orzen, Henrik, 2006. "Do forward markets enhance competition?: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 415-431, November.
  4. Miller, Ross M & Plott, Charles R & Smith, Vernon L, 1977. "Intertemporal Competitive Equilibrium: An Empirical Study of Speculation," The Quarterly Journal of Economics, MIT Press, vol. 91(4), pages 599-624, November.
  5. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October.
  6. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
  7. Klaus Abbink & Jordi Brandts & Tanga McDaniel, 2002. "Asymmetric demand information in uniform and discriminatory call auctions: an experimental analysis motivated by electricity markets," UFAE and IAE Working Papers 520.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  8. Steffen Huck & Hans-Theo Normann & Joerg Oechssler, 1997. "Learning in Cournot Oligopoly - An Experiment," Game Theory and Information 9707009, EconWPA, revised 22 Jul 1997.
  9. Hoffman, Elizabeth & Plott, Charles R, 1981. "The Effect of Intertemporal Speculation on the Outcomes in Seller Posted Offer Auction Markets," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 223-41, May.
  10. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  11. Rassenti, Stephen & Reynolds, Stanley S. & Smith, Vernon L. & Szidarovszky, Ferenc, 2000. "Adaptation and convergence of behavior in repeated experimental Cournot games," Journal of Economic Behavior & Organization, Elsevier, vol. 41(2), pages 117-146, February.
  12. Rassenti, Stephen J & Smith, Vernon L & Wilson, Bart J, 2003. "Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels," Journal of Regulatory Economics, Springer, vol. 23(2), pages 109-23, March.
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