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Measuring market power in the Iberian electricity wholesale market through the residual demand curve

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Author Info

  • Vitor Marques

    ()
    (Entidade Reguladora dos Serviços Energéticos, Lisboa)

  • Isabel Soares

    ()
    (CETE, Faculdade de Economia, Universidade do Porto)

  • Adelino Fortunato

    ()
    (Faculdade de Economia da Universidade de Coimbra)

Abstract

The existence of market power in the electricity market is a recurrent issue. Measuring and understanding market power practices in the Iberian electricity market turn out to be interesting: though a liberalized market, two integrated firms control 80% of total demand and there is a strong - often direct - intervention of government in the market. For various reasons, among which the difficulty in obtaining reliable, extensive data stands out, market power in the Iberian electricity market has rarely been measured. This work aims to contribute to a better knowledge of the way market power occurs. We calculate the elasticity of residual demand to evaluate the two dominant firm’s market power, using hourly bides in the Spanish spot market for the period July-August 2004 to 2006. Although our approach was highlighted by Frank Wolak work on the electricity sector, we extend it and discuss its constraints. We discuss the results obtained in the light of the evolution of the electricity sector during that period.

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File URL: http://www.fep.up.pt/investigacao/cete/papers/DP0801.pdf
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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CEF.UP Working Papers with number 0801.

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Length: 19 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:por:cetedp:0801

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Keywords: Market power; wholesale market; residual demand curve elasticity; government intervention;

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  1. 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.
  2. Aitor Ciarreta & María Espinosa, 2010. "Market power in the Spanish electricity auction," Journal of Regulatory Economics, Springer, vol. 37(1), pages 42-69, February.
  3. Baker, Jonathan B. & Bresnahan, Timothy F., 1988. "Estimating the residual demand curve facing a single firm," International Journal of Industrial Organization, Elsevier, vol. 6(3), pages 283-300.
  4. 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.
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Cited by:
  1. Ciarreta, Aitor & Espinosa, María Paz, 2012. "The impact of regulation on pricing behavior in the Spanish electricity market (2002–2005)," Energy Economics, Elsevier, vol. 34(6), pages 2039-2045.

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