Predicting market power in wholesale electricity markets
AbstractThe traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0837.
Date of creation: Aug 2008
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Residual Supply Index; Cournot equilibrium; Lerner Index; electricity markets; market power;
Other versions of this item:
- David Newbery, 2009. "Predicting Market Power in Wholesale Electricity Markets," EUI-RSCAS Working Papers 3, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
- David Newbery, 2009. "Predicting Market Power in Wholesale Electricity Markets," RSCAS Working Papers 2009/03, European University Institute.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-05 (All new papers)
- NEP-COM-2008-09-05 (Industrial Competition)
- NEP-ENE-2008-09-05 (Energy Economics)
- NEP-IND-2008-09-05 (Industrial Organization)
- NEP-LAW-2008-09-05 (Law & Economics)
- NEP-MIC-2008-09-05 (Microeconomics)
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