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Asymmetric Price Transmission in Supply Function Equilibrium, Carbon Prices and the German Electricity Spot Market

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  • Wölfing, Nikolas

Abstract

In January 2007, first evidence of an asymmetric pass-through of CO2 emission allowance prices was reported for the German electricity spot market. This paper explores the theoretical basis for such an asymmetry in the context of a supply function bidding duopoly. It interprets fluctuating carbon prices as a coordination mechanism for tacitly colluding firms and studies incentive compatibility in the repeated game. It is new in its attempt to model asymmetric behaviour in a spot market without relevant frictions, and gives a reasoning why the asymmetry shows up for emission allowances only. The paper concludes with a theorem: that asymmetric price transmission is sustained up to a certain maximum level which might include the monopoly solution and that this mechanism is always preferred to non-cooperation. --

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 08-040.

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Date of creation: 2008
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Handle: RePEc:zbw:zewdip:7346

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Keywords: Asymmetric price transmission; Electricity spot markets; Emission allowances;

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  1. Severin Borenstein & A. Colin Cameron, 1992. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," NBER Working Papers 4138, National Bureau of Economic Research, Inc.
  2. E. Roy Weintraub & Evelyn L. Forget, 2007. "Introduction," History of Political Economy, Duke University Press, vol. 39(5), pages 1-6, Supplemen.
  3. Green, Richard J, 1996. "Increasing Competition in the British Electricity Spot Market," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 205-16, June.
  4. Bolle, Friedel, 1992. "Supply function equilibria and the danger of tacit collusion : The case of spot markets for electricity," Energy Economics, Elsevier, vol. 14(2), pages 94-102, April.
  5. Sam Peltzman, 1998. "Prices Rise Faster Than They Fall," University of Chicago - George G. Stigler Center for Study of Economy and State 142, Chicago - Center for Study of Economy and State.
  6. Ross Baldick & Ryan Grant & Edward Kahn, 2004. "Theory and Application of Linear Supply Function Equilibrium in Electricity Markets," Journal of Regulatory Economics, Springer, vol. 25(2), pages 143-167, 03.
  7. Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers 367, California Institute of Technology, Division of the Humanities and Social Sciences.
  8. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  9. Matt Lewis, 2004. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," Industrial Organization 0407010, EconWPA.
  10. Georg Zachmann & Christian von Hirschhausen, 2007. "First Evidence of Asymmetric Cost Pass-through of EU Emissions Allowances: Examining Wholesale Electricity Prices in Germany," Discussion Papers of DIW Berlin 708, DIW Berlin, German Institute for Economic Research.
  11. Turnbull, Stephen J., 1983. "Choosing duopoly solutions by consistent conjectures and by uncertainty," Economics Letters, Elsevier, vol. 13(2-3), pages 253-258.
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