Estimating market power in homogenous product markets using a composed error model: application to the California electricity market
AbstractThis study contributes to the literature on estimating market power in homogenous product markets. We estimate a composed error model, where the stochastic part of the firm’s pricing equation is formed by two random variables: the traditional error term, capturing random shocks, and a random conduct term, which measures the degree of market power. Treating firms’ conduct as a random parameter helps solving the issue that the conduct parameter can vary between firms and within firms over time. The empirical results from the California wholesale electricity market suggest that realization of market power varies over both time and firms, and reject the assumption of a common conduct parameter for all firms. Notwithstanding these differences, the estimated firm-level values of the conduct parameter are closer to Cournot than to static collusion across all specifications. For some firms, the potential for realization of the market power unilaterally is associated with lower values of the conduct parameter.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1220.
Date of creation: 25 Apr 2012
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market power; random conduct parameter; composed error model; asymmetric distributions; California electricity market;
Find related papers by JEL classification:
- C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-08 (All new papers)
- NEP-BEC-2012-05-08 (Business Economics)
- NEP-COM-2012-05-08 (Industrial Competition)
- NEP-ENE-2012-05-08 (Energy Economics)
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