How to Determine whether Regional Markets are Integrated? Theory and Evidence from European Electricity Markets
AbstractPrices may di er between regional markets if transport capacities are limited. We develop a new approach to determine to which extent such di erences stem from limited participation in cross-border trader rather than from bottlenecks. We derive a theoretical integration benchmark for the typical case where transportation markets clear before the product markets, using Grossman's (1976) notion of a rational expectations equilibrium. We compare the benchmark to data from European electricity markets. The data reject the integration hypothesis: Capacity prices contain too little information about spot price di erential; this indicates that well informed traders do not engage in cross-border trade.
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Bibliographic InfoPaper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 236.
Date of creation: Apr 2008
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Market integration; electricity markets; interconnector; competition policy; rational expectations equilibrium;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-13 (All new papers)
- NEP-EEC-2008-06-13 (European Economics)
- NEP-ENE-2008-06-13 (Energy Economics)
- NEP-MIC-2008-06-13 (Microeconomics)
- NEP-URE-2008-06-13 (Urban & Real Estate Economics)
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