Arbitrage in energy markets: Competing in the incumbent's shadow
AbstractThis paper studies the welfare implications of using market mechanisms to allocate transmission capacity in recently liberalized electricity markets. It questions whether access to this essential facility should be traded on a market, or whether the incumbent should retain exclusive usage rights. We show that granting exclusive use to the incumbent might be optimal, if the capacity of the essential facility is small and the incumbent can reduce production costs by taking advantage of interregional production-cost differences. This result counters the intuition that arbitrage will improve the social surplus when there is no output contraction. The reason is that when competition is imperfect, arbitrage might reduce production efficiency. We advise policymakers to introduce market mechanisms for the allocation of transmission capacity only if sufficient investment in the network is ensured or if the market power of the incumbent is broken in at least one of the markets in which it is active.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/175423.
Date of creation: 2007
Date of revision:
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Web page: http://www.kuleuven.be
Competition; Efficiency; Market; Markets; Functions; Data; Arbitrage;
Other versions of this item:
- Gerd Küpper & Bert Willems, 2007. "Arbitrage in energy markets: competing in the incumbent's shadow," Center for Economic Studies - Discussion papers ces0730, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- Kupper Gerd & Willems Bert, 2007. "Arbitrage in Energy Markets: Competing in the Incumbent’s Shadow," Energy, Transport and Environment Working Papers Series ete0707, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
- Kupper, G. & Willems, Bert, 2007. "Arbitrage in Energy Markets: Competing in the Incumbent's Shadow," Discussion Paper 2007-094, Tilburg University, Center for Economic Research.
- Kupper, G. & Willems, Bert, 2007. "Arbitrage in Energy Markets: Competing in the Incumbent's Shadow," Discussion Paper 2007-034, Tilburg University, Tilburg Law and Economic Center.
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Bert Willems, 2002. "Barring consumers from the electricity network might improve welfare," Energy, Transport and Environment Working Papers Series ete0213, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
- Reza Ahmadi & B. Rachel Yang, 2000. "Parallel Imports: Challenges from Unauthorized Distribution Channels," Marketing Science, INFORMS, vol. 19(3), pages 279-294, March.
- Dijk, Justin & Willems, Bert, 2011.
"The effect of counter-trading on competition in electricity markets,"
Elsevier, vol. 39(3), pages 1764-1773, March.
- Dijk, Justin & Willems, Bert, 2011. "The effect of counter-trading on competition in electricity markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4561526, Tilburg University.
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