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Divesting power

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Author Info

  • Federico, Giulio

    ()
    (IESE Business School)

  • Lopez, Angel L.

    (IESE Business School)

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    Abstract

    We study alternative market power mitigation measures in a model where a dominant producer faces a competitive fringe with the same cost structure. We characterise the asset divestment by the dominant firm which achieves the greatest reduction in prices. This divestment entails the sale of marginal assets whose cost range encompasses the post-divestment price. A divestment of this type can be several times more effective in reducing prices than divestments of baseload (or low-cost) assets. We also establish that financial contracts (modeled as Virtual Power Plant schemes) are at best equivalent to baseload divestments in terms of consumer welfare.

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    Bibliographic Info

    Paper provided by IESE Business School in its series IESE Research Papers with number D/812.

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    Length: 35 pages
    Date of creation: 01 Aug 2009
    Date of revision:
    Handle: RePEc:ebg:iesewp:d-0812

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    Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
    Web page: http://www.iese.edu/
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    Related research

    Keywords: Divestments; Virtual power plants; contracts; market power; electricity; antitrust remedies;

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    References

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    1. Christian Schultz, 2005. "Virtual Capacity and Competition," CESifo Working Paper Series 1487, CESifo Group Munich.
    2. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
    3. Bert Willems, 2004. "Cournot Competition, Financial Option markets and Efficiency," Center for Economic Studies - Discussion papers ces0414, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
    4. Bushnell, James, 2007. "Oligopoly Equilibria in Electricity Contract Markets," Staff General Research Papers 13135, Iowa State University, Department of Economics.
    5. de Frutos, Maria-Angeles & Fabra, Natalia, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers 6756, C.E.P.R. Discussion Papers.
    6. Richard Gilbert & David Newbery, 2008. "Analytical Screens for Electricity Mergers," Review of Industrial Organization, Springer, vol. 32(3), pages 217-239, May.
    7. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
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    Cited by:
    1. de Frutos, María-Ángeles & Fabra, Natalia, 2012. "How to allocate forward contracts: The case of electricity markets," European Economic Review, Elsevier, vol. 56(3), pages 451-469.
    2. Federico, Giulio & López, Ángel L., 2013. "Optimal asset divestments with homogeneous products," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 12-25.

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