Predicting Market Power in Wholesale Electricity Markets
AbstractThe traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.
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Bibliographic InfoPaper provided by European University Institute in its series RSCAS Working Papers with number 2009/03.
Date of creation: 02 Feb 2009
Date of revision:
Residual Supply Index; Cournot equilibrium; Lerner Index; electricity markets; market power;
Other versions of this item:
- Newbery, D., 2008. "Predicting market power in wholesale electricity markets," Cambridge Working Papers in Economics 0837, Faculty of Economics, University of Cambridge.
- David Newbery, 2009. "Predicting Market Power in Wholesale Electricity Markets," EUI-RSCAS Working Papers 3, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-07 (All new papers)
- NEP-COM-2009-03-07 (Industrial Competition)
- NEP-ENE-2009-03-07 (Energy Economics)
- NEP-IND-2009-03-07 (Industrial Organization)
- NEP-LAW-2009-03-07 (Law & Economics)
- NEP-MIC-2009-03-07 (Microeconomics)
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