Imperfect Competition and Market Power

Electricity generation in many countries is dominated by a small number of companies, e.g. EDF in France. This raises concerns that large players may be willing and capable of strategically distorting market results away from competitive outcomes in favour of their profits. This chapter first discusses indicators and analyses of market power, starting with general concepts like the Hirshman-Herfindahl-Index (HHI) but also introducing power-sector specific approaches like the pivotal supplier index and the residual supplier index. Beyond these indicators of market structure, approaches focusing on market conduct and market results are discussed. Turning towards economic models for imperfect competition, standard models are classified and complemented with a small example for the seminal Cournot model. For more advanced concepts like conjectured supply functions and supply function equilibria, the basic ideas and relevant applications are sketched. Also the broad class of so-called mixed complementarity problems and related problem classes such as bi-level models are put into context. Regarding the retail market, a detailed model for consumer switching behaviour is presented which highlights the importance of customer price sensitivity for market outcomes. Finally, the institutional framework for competition oversight and the thereby used concept of workable competition are discussed.