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Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets

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  • James B. Bushnell
  • Erin T. Mansur
  • Celeste Saravia

Abstract

This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure. (JEL L11, L13, L94)

Suggested Citation

  • James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, vol. 98(1), pages 237-266, March.
  • Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:237-66
    Note: DOI: 10.1257/aer.98.1.237
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    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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    1. Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets (AER 2008) in ReplicationWiki

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