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Structural versus Behavioral Measures in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns

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  • Silvester van Koten
  • Andreas Ortmann

Abstract

We try to better understand the comparative advantages of structural and behavioral measures of deregulation in electricity markets, an eminent policy issue for which the experimental evidence is scant and problematic. In the present paper we investigate theoretically and experimentally the effects of the introduction of a forward market on competition in electricity markets. We compare this scenario with the best alternative, reducing concentration by adding one more competitor by divestiture. Our work contributes to the literature by introducing more realistic cost configurations, teasing apart number and asset effect, and studying numbers of competitors that reflect better the market concentration in the European electricity industries. Our experimental data suggest that introducing a forward market has a positive effect on the aggregate supply in markets with two or three major competitors, configurations typical for both the newly accessed and the old European Union member states. Introducing a forward market also increases efficiency. Our data furthermore suggest, in contrast to previous findings, that the effects of introducing a forward market is stronger than adding one more competitor both in markets with two, and particularly three, producers. Our data thus suggest that the behavioral measure of introducing a forward market is more effective than the structural measure of adding one more competitor by divestiture. Thus competition authorities should, in line with EU law, focus on the behavioral measure of introducing, or at least facilitating the emergence of, forward markets rather than on the structural measure of lowering market concentration by divestiture.

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Bibliographic Info

Paper provided by European University Institute in its series RSCAS Working Papers with number 2011/07.

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Date of creation: 24 Feb 2011
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Handle: RePEc:rsc:rsceui:2011/07

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Keywords: economics experiments; market power; competition; forward markets; EU electricity market;

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Citations

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Cited by:
  1. Silvester van Koten & Andreas Ortmann, 2011. "Structural versus Behavioral Measures in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns," RSCAS Working Papers 2011/07, European University Institute.
  2. Schubert, Jens, 2013. "The Impact of Forward Trading on Tacit Collusion: Experimental Evidence," MPRA Paper 43768, University Library of Munich, Germany.
  3. Silvester van Koten, 2014. "Do Emission Trading Schemes Facilitate Efficient Abatement Investments? An Experimental Study," CERGE-EI Working Papers wp503, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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