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An Empirical Model of Imperfect Dynamic Competition and Application to Hydroelectricity Storage

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Author Info
Olli Kauppi
Matti Liski
Abstract

The Nordic power market presents a unique opportunity for testing the nature and degree of market power in storage behavior due to preciseness of data on market fundamentals determining hydro resource use. We develop an explicit model of dynamic imperfect competition mapping the primitive distributions to market outcomes as a function of the market structure. We estimate the market structure that best explains the main behavioral patterns in pricing, storage, and production in years 2000-05. Exceptional events in the data allow us to identify a pattern for market power. We simulate the expected effiency loss from the pattern and limited scope for social losses. Market power however increases expected reservoir and price levels, and also implies an increase in price risk.

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Paper provided by Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research in its series Working Papers with number 0811.

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Date of creation: Sep 2008
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Handle: RePEc:mee:wpaper:0811

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  1. Amundsen, E.S. & Bergman, L., 2000. "Will Cross-Ownership Reestablish Market Power in the Nordic Power Market?," Norway; Department of Economics, University of Bergen 1900, Department of Economics, University of Bergen.
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  2. 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. [Downloadable!]
  3. Newbery, David M, 1984. "Commodity Price Stabilization in Imperfect or Cartelized Markets," Econometrica, Econometric Society, vol. 52(3), pages 563-78, May. [Downloadable!] (restricted)
  4. Stephen Ryan, 2006. "The Costs of Environmental Regulation in a Concentrated Industry," 2006 Meeting Papers 9, Society for Economic Dynamics.
  5. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September. [Downloadable!] (restricted)
  6. Garcia, Alfredo & Reitzes, James D & Stacchetti, Ennio, 2001. "Strategic Pricing when Electricity is Storable," Journal of Regulatory Economics, Springer, vol. 20(3), pages 223-47, November. [Downloadable!] (restricted)
  7. Torstein Bye, Annegrete Bruvoll and Finn Roar Aune, 2006. "The importance of volatility in inflow in a deregulated hydro-dominated power market," Discussion Papers 472, Research Department of Statistics Norway. [Downloadable!]
  8. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, 09. [Downloadable!] (restricted)
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  9. Amundsen, Eirik S. & Bergman, Lars, 2006. "Why has the Nordic electricity market worked so well?," Utilities Policy, Elsevier, vol. 14(3), pages 148-157, September. [Downloadable!] (restricted)
  10. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October. [Downloadable!] (restricted)
  11. Hoel, Michael, 2004. "Electricity prices in a mixed thermal and hydropower system," Memorandum 28/2004, Oslo University, Department of Economics. [Downloadable!]
  12. Reiss, Peter C. & Wolak, Frank A., 2007. "Structural Econometric Modeling: Rationales and Examples from Industrial Organization," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 64 Elsevier. [Downloadable!] (restricted)
  13. Crampes, C. & Moreaux, M., 2001. "Water resource and power generation," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 975-997, May. [Downloadable!] (restricted)
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