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Investments in Electricity Generating Capacity under Different Market Structures and with Endogenously Fixed Demand


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  • Anette Boom


Investments in Generating Capacities between a monopolist and two competing firms are compared where the firms invest in their capacity and fix the retail price while electricity demand is uncertain. A unit price auction determines the wholesale electricity price when the firms compete. They know the level of demand when they bid their capacities. Total capacities can be larger or smaller with a duopoly than with a monopoly. If the two firms co-ordinate on a pareto dominant equilibrium, then the retail price is always higher and the social welfare lower in the competitive case, which exists only if capacity costs are not too high. ZUSAMMENFASSUNG - (Investitionen in Stromerzeugungskapazität bei verschiedenen Marktstrukturen und endogen fixierter Nachfrage) Die Investitionen in Stromerzeugungskapazität von einem Monopolisten werden mit denen zweier konkurrierender Unternehmen verglichen. Dabei investieren die Unternehmen in ihre Kapazität und setzen ihren Einzelhandelspreis, bevor sich die unsichere Nachfrage realisiert hat. Im Falle konkurrierender Firmen bestimmt sich der Großhandelspreis in einer nicht-diskriminierenden Auktion. Die Unternehmen kennen die Nachfragerealisation, wenn sie dort Ihre Gebote abgeben. Die Gesamtkapazität im Duopol kann sowohl größer als auch kleiner sein als im Monopol. Falls die zwei Unternehmen sich jedoch auf ein paretodominantes Gleichgewicht koordinieren, dann ist der Einzelhandelspreis immer höher und die soziale Wohlfahrt immer niedriger im Wettbewerbsgleichgewicht als im Monopol, wobei ersteres nur bei relativ geringen Kapazitätskosten existiert.

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Bibliographic Info

Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number SP II 2003-01.

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Length: 30 pages
Date of creation: Jun 2003
Date of revision:
Handle: RePEc:wzb:wzebiv:spii2003-01

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Keywords: Electricity Markets; Investments; Generating Capacities; Monopoly; Competition;

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Cited by:
  1. Neuhoff, K. & de Vries, L., 2004. "'Insufficient Incentives for Investment in Electricity Generation’," Cambridge Working Papers in Economics 0428, Faculty of Economics, University of Cambridge.
  2. Arie ten Cate & Mark Lijesen, 2004. "The Elmar model: output and capacity in imperfectly competitive electricity markets," CPB Memorandum 94, CPB Netherlands Bureau for Economic Policy Analysis.
  3. Rob Aalbers & Victoria Shestalova & Sander Onderstal, 2004. "Better safe than sorry? Reliability policy in network industries," CPB Document 73, CPB Netherlands Bureau for Economic Policy Analysis.
  4. Paulun, Tobias & Feess, Eberhard & Madlener, Reinhard, 2010. "Why Higher Price Sensitivity of Consumers May Increase Average Prices: An Analysis of the European Electricity Market," FCN Working Papers 16/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).


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