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Oligopoly Equilibria in Electricity Contract Markets

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  • Bushnell, James

Abstract

This paper examines the implications of forward contracting on oligopoly environments by extending the model of Allaz and Vila to an environment with multi- ple firms and increasing marginal cost. Estimates of key parameters of this model are taken from existing electricity markets to predict the market impact of one round of public contracting, such as those seen in auctions for retail provision and resource pro- curement. The results imply that, when forward contracts are present, the importance of supplier concentration is greatly magnified relative to other determinants unilateral market power such as demand elasticity.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 13135.

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Date of creation: 01 Dec 2007
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Publication status: Published in Journal of Regulatory Economics, December 2007, vol. 32 no. 3, pp. 225-245
Handle: RePEc:isu:genres:13135

Contact details of provider:
Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Related research

Keywords: contracts; cournot competition; competition policy; electricity markets;

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References

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  1. Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
  2. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
  3. Joshua S Gans, 2004. "Vertical Contracting When Competition for Orders Precedes Procurement," Econometric Society 2004 Australasian Meetings 123, Econometric Society.
  4. Farrell, Joseph & Shapiro, Carl, 1988. "Horizontal Mergers: An Equilibrium Analysis," Department of Economics, Working Paper Series qt0tp305nx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Juan Toro & Natalia Fabra, 2002. "Price Wars and Collusion in the Spanish Electricity Market," Economics Series Working Papers 136, University of Oxford, Department of Economics.
  6. Bushnell, James, 2004. "California's electricity crisis: a market apart?," Energy Policy, Elsevier, vol. 32(9), pages 1045-1052, June.
  7. Green, Richard & Le Coq, ChloƩ, 2010. "The length of contracts and collusion," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 21-29, January.
  8. Liski, Matti & Montero, Juan-Pablo, 2006. "Forward trading and collusion in oligopoly," Journal of Economic Theory, Elsevier, vol. 131(1), pages 212-230, November.
  9. 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.
  10. 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.
  11. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2007. "Vertical Arrangements, Market Structure, and Competition An Analysis of Restructured U.S. Electricity Markets," NBER Working Papers 13507, National Bureau of Economic Research, Inc.
  12. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
  13. Bushnell, James, 2005. "Looking for Trouble: Competition Policy in the U.S. Electricity Industry," Staff General Research Papers 13140, Iowa State University, Department of Economics.
  14. Colin Loxley & David Salant, 2004. "Default Service Auctions," Journal of Regulatory Economics, Springer, vol. 26(2), pages 201-229, 09.
  15. Borenstein, Severin & Bushnell, James, 1999. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 285-323, September.
  16. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers 31547, Iowa State University, Department of Economics.
  17. Mansur, Erin T, 2007. "Upstream Competition and Vertical Integration in Electricity Markets," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 125-56, February.
  18. Hughes, John S. & Kao, Jennifer L., 1997. "Strategic forward contracting and observability," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 121-133, November.
  19. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, vol. 108(1), pages 141-151, January.
  20. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
  21. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
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