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Vertical Integration and Long-Term Contracts in Risky Markets

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  • Baldursson , Fridrik M.

    ()
    (University of Iceland)

  • von der Fehr, Nils-Henrik

    ()
    (Dept. of Economics, University of Oslo)

Abstract

We consider the effects of vertical integration on the performance of long-term and spot markets when spot prices are uncertain and agents are risk averse. We find that vertical integration impairs market performance by increasing the gap between contract and (expected) spot prices. This holds regardless of whether retail prices are fixed or linked to spot prices. Depending upon the characteristics of demand and supply, vertical integration (and long-term contracting) may increase or decrease spot-price volatility.

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File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2007/Memo-01-2007.pdf
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Bibliographic Info

Paper provided by Oslo University, Department of Economics in its series Memorandum with number 01/2007.

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Length: 37 pages
Date of creation: 30 Jan 2007
Date of revision:
Handle: RePEc:hhs:osloec:2007_001

Contact details of provider:
Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Email:
Web page: http://www.oekonomi.uio.no/indexe.html
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Related research

Keywords: Vertical integration; long-term contracts; spot markets; risk aversion; electricity markets;

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References

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  1. Fabra, Natalia & Toro, Juan, 2005. "Price wars and collusion in the Spanish electricity market," International Journal of Industrial Organization, Elsevier, vol. 23(3-4), pages 155-181, April.
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  3. M. von der Fehr, Nils-Henrik & Amundsen, Eirik S. & Bergman, Lars, 2004. "The Nordic Market: Signs Of Stress?," Working Papers in Economics 15/04, University of Bergen, Department of Economics.
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Cited by:
  1. Willems, Bert & Morbee, Joris, 2010. "Market completeness: How options affect hedging and investments in the electricity sector," Energy Economics, Elsevier, vol. 32(4), pages 786-795, July.

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