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Forward markets may not decrease market power when capacities are endogenous

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  • MURPHY, Frederic
  • SMEERS, Yves
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    Abstract

    This paper analyzes the properties of three capacity games in an oligopolistic market with Cournot players. In the first game, capacity and the operation of that capacity is determined simultaneously. This is the classic open-loop Cournot game. In the second game capacity is decided in the first stage and the operation of that capacity is determined in the second stage. The first stage decision of each player is contingent on the solution of the second-stage game. This is a two-stage, closed-loop game. We show that when the solution exists, it is the same as the solution in the first game. However, it does not always exist. The third game has three stages with a futures position taken between the capacity stage and the operations stage and is also a closed-loop game. As with the second game, the equilibrium is the same as the open-loop game when it exists. However, the conditions for existence are more restrictive once a futures market is added. When both games have an equilibrium, the solution values are identical. The results are very different from games with no capacity stage as studied by Allaz and Vila (1993), which have been used to argue that futures markets can ameliorate market power.

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    Bibliographic Info

    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2005028.

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    Date of creation: 00 2005
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    Handle: RePEc:cor:louvco:2005028

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
    2. Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 1-39.
    3. Le Coq, Chloé & Orzen, Henrik, 2002. "Do Forward Markets Enhance Competition? Experimental Evidence," Working Paper Series in Economics and Finance 506, Stockholm School of Economics, revised 01 Oct 2004.
    4. Rajnish Kamat & Shmuel Oren, 2004. "Two-settlement Systems for Electricity Markets under Network Uncertainty and Market Power," Journal of Regulatory Economics, Springer, vol. 25(1), pages 5-37, January.
    5. Gregory Goering & Michael Pippenger, 2002. "Durable Goods Monopoly and Forward Markets," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(2), pages 271-282.
    6. Powell, Andrew, 1993. "Trading Forward in an Imperfect Market: The Case of Electricity in Britain," Economic Journal, Royal Economic Society, vol. 103(417), pages 444-53, March.
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    Cited by:
    1. Holmberg, P. & Newbery, D., 2010. "The Supply Function Equilibrium and its Policy Implications for Wholesale Electricity Auctions," Cambridge Working Papers in Economics 1016, Faculty of Economics, University of Cambridge.
    2. David, Laurent & Le Breton, Michel & Merillon, Olivier, 2007. "Regulating the Natural Gas Transportation Industry: Optimal Pricing Policy of a Monopolist with Advance-Purchase and Spot Markets," IDEI Working Papers 488, Institut d'Économie Industrielle (IDEI), Toulouse.
    3. Roques, F.A. & Savva , N.S., 2006. "Price Cap Regulation and Investment Incentives under Demand Uncertainty," Cambridge Working Papers in Economics 0636, Faculty of Economics, University of Cambridge.
    4. Scholz, Sebastian, 2010. "Derivatives and Default Risk," Discussion Papers in Economics 11317, University of Munich, Department of Economics.
    5. Marek Kočan, 2008. "Cyclic behavior in dynamic investment decisions for deregulated energy markets," Central European Journal of Operations Research, Springer, vol. 16(1), pages 67-78, March.

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