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Estimating Marginal Costs and Market Power in the Italian Electricity Auctions

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  • Bruno Bosco

    ()
    (Department of Legal and Economic Systems, Università degli Studi di Milano-Bicocca)

  • Lucia Parisio

    ()
    (Department of Legal and Economic Systems, Università degli Studi di Milano-Bicocca)

  • Matteo Pelagatti

    ()
    (Department of Statistics, Università degli Studi di Milano-Bicocca)

Abstract

In this paper we examine the bidding behaviour of firm competing in the Italian wholesale electricity market where generators submit hourly supply schedule to sell power. We describe the institutional characteristics of the Italian market and derive generators' equilibrium bidding functions. We also discuss the main empirical strategies followed by the recent econometrical literature to obtain estimates of (unobservable) optimal bids. Then, we use individual bid data, quantity volumes and other control variables to compare actual bidding behaviour to theoretical benchmarks of profit maximization. We obtain estimates of generators' costs to be used in conjunction with hourly market equilibrium prices to derive some measures of the extent of market power in the Italian electricity sector and of its exploitation by firms.

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File URL: http://www.statistica.unimib.it/utenti/WorkingPapers/WorkingPapers/20100201.pdf
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Bibliographic Info

Paper provided by Università degli Studi di Milano-Bicocca, Dipartimento di Statistica in its series Working Papers with number 20100201.

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Length: 17 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:mis:wpaper:20100201

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Keywords: Bidding behaviour in Electricity markets; Estimates of optimal bid functions; Measures of market power;

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  1. Parisio, Lucia & Bosco, Bruno, 2006. "Electricity prices and cross-border trade: volume and strategy effects," MPRA Paper 473, University Library of Munich, Germany.
  2. Susan Athey & Philip A. Haile, 2006. "Empirical Models of Auctions," NBER Working Papers 12126, National Bureau of Economic Research, Inc.
  3. Crawford, Gregory S. & Crespo, Joseph & Tauchen, Helen, 2007. "Bidding asymmetries in multi-unit auctions: Implications of bid function equilibria in the British spot market for electricity," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1233-1268, December.
  4. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002.
  5. Kai-Uwe Kühn & Matilde Machado, 2004. "Bilateral Market Power And Vertical Integration In The Spanish Electricity Spot Market," Working Papers wp2004_0414, CEMFI.
  6. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November.
  7. Parisio, Lucia & Bosco, Bruno, 2003. "Market Power and the Power Market: Multi-unit Bidding and (In)Efficiency in Electricity Auctions," International Tax and Public Finance, Springer, vol. 10(4), pages 377-401, August.
  8. Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2000. "Optimal Nonparametric Estimation of First-Price Auctions," Econometrica, Econometric Society, vol. 68(3), pages 525-574, May.
  9. Bruno Bosco & Lucia Parisio & Matteo Pelagatti & Fabio Baldi, 2010. "Long-run relations in european electricity prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(5), pages 805-832.
  10. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-46, May.
  11. 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.
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