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Dynamic Competition and Arbitrage in Electricity Markets: The Role of Financial Players

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  • Ignacia Mercadal

Abstract

I study the effects of financial players who trade alongside physical buyers and sellers in electricity markets. Using detailed firm-level data, I examine physical and financial firms' responses to regulation that exogenously increased financial trading. I show that the effect of speculators on generators' market power depends on the kind of equilibrium they are in. I develop a test of the null of static Nash equilibrium and reject it. To implement the test, I present a new method to define markets using machine-learning tools. I find that increased financial trading reduced generators' market power and increased consumer surplus.

Suggested Citation

  • Ignacia Mercadal, 2022. "Dynamic Competition and Arbitrage in Electricity Markets: The Role of Financial Players," American Economic Journal: Microeconomics, American Economic Association, vol. 14(3), pages 665-699, August.
  • Handle: RePEc:aea:aejmic:v:14:y:2022:i:3:p:665-99
    DOI: 10.1257/mic.20190276
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    Citations

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    Cited by:

    1. Enghin Atalay & Erika Frost & Alan Sorensen & Christopher Sullivan & Wanjia Zhu, 2023. "Scalable Demand and Markups," Working Papers 23-15, Federal Reserve Bank of Philadelphia.
    2. Luis E. Gonzales & Koichiro Ito & Mar Reguant, 2023. "The Investment Effects of Market Integration: Evidence From Renewable Energy Expansion in Chile," Econometrica, Econometric Society, vol. 91(5), pages 1659-1693, September.

    More about this item

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • 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
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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