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Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns

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  • van Koten, Silvester
  • Ortmann, Andreas

Abstract

We experimentally study the effects of introducing a forward market and of increasing the number of competitors in a quantity-setting market under strictly convex production costs. Our key interest is to better understand which of these two remedies is more effective at enhancing competition. Allaz and Vila (1993) theorized that forward markets can have a pro-competitive effect under linear production costs. Le Coq and Orzen (2006) and Brandts et al. (2008) investigated this and related issues experimentally. All three experiments (including ours) support the prediction by Allaz and Vila (1993) that introducing a forward market does indeed intensify competition. The results of the present study, however, differ from previous experimental results in that we find the forward market to be the more effective remedy. Brandts et al. (2008) increase the number of competitors by entry, which thus increases the aggregate stock of production assets and makes output cheaper. In contrast, we increase the number of competitors by divestiture, which leaves the aggregate stock of production assets constant. Our results address an important policy issue and provide tentative evidence on the competition-enhancing effect of forward markets, which can be considered a behavioral remedy.

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  • van Koten, Silvester & Ortmann, Andreas, 2013. "Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns," European Economic Review, Elsevier, vol. 64(C), pages 256-265.
  • Handle: RePEc:eee:eecrev:v:64:y:2013:i:c:p:256-265
    DOI: 10.1016/j.euroecorev.2013.09.004
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    Cited by:

    1. van Koten, Silvester, 2021. "The forward premium in electricity markets: An experimental study," Energy Economics, Elsevier, vol. 94(C).
    2. van Koten, Silvester & Ortmann, Andreas, 2013. "Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns," European Economic Review, Elsevier, vol. 64(C), pages 256-265.
    3. Moritz Bohland & Sebastian Schwenen, 2020. "Technology Policy and Market Structure: Evidence from the Power Sector," Discussion Papers of DIW Berlin 1856, DIW Berlin, German Institute for Economic Research.
    4. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.
    5. David P. Brown & Andrew Eckert, 2018. "Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 101-137, February.
    6. Silvester van Koten, 2014. "Do Emission Trading Schemes Facilitate Efficient Abatement Investments? An Experimental Study," CERGE-EI Working Papers wp503, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    7. Dressler, Luisa, 2016. "Support schemes for renewable electricity in the European Union: Producer strategies and competition," Energy Economics, Elsevier, vol. 60(C), pages 186-196.
    8. Schubert, Jens, 2015. "The impact of forward contracting on tacit collusion: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 109-123.
    9. Bohland, Moritz & Schwenen, Sebastian, 2022. "Renewable support and strategic pricing in electricity markets," International Journal of Industrial Organization, Elsevier, vol. 80(C).
    10. José Luis Ferreira & Praveen Kujal & Stephen Rassenti, 2016. "Multiple Openings and Competitiveness of Forward Markets: Experimental Evidence," PLOS ONE, Public Library of Science, vol. 11(7), pages 1-16, July.
    11. Chloé Coq & Henrik Orzen & Sebastian Schwenen, 2017. "Pricing and capacity provision in electricity markets: an experimental study," Journal of Regulatory Economics, Springer, vol. 51(2), pages 123-158, April.
    12. Schubert, Jens, 2013. "The Impact of Forward Trading on Tacit Collusion: Experimental Evidence," MPRA Paper 43768, University Library of Munich, Germany.
    13. Nobuyuki Hanaki & Aidas Masiliunas, 2021. "Market Concentration and Incentives to Collude in Cournot Oligopoly Experiments," ISER Discussion Paper 1131, Institute of Social and Economic Research, Osaka University.

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    More about this item

    Keywords

    European electricity markets; Economics experiments; Forward markets; Divestiture; Competition policy;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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