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Investments in Electricity Generation Capacity under Different Market Structures with Price Responsive Demand

  • Anette Boom

    ()

Investments in Generation Capacities by a social planner, by a monopolist and by two competing firms are compared when electricity demand is uncertain but price responsive. A unit price auction determines the electricity price when firms compete. Firms know the level of demand when they bid their capacities. With simultaneous capacity choices total capacities are always larger than with a monopoly if a subgame perfect equilibrium in pure strategies exists. With sequential capacity choices existence is always ensured and the aggregate capacity is smaller in the duopoly than with a monopolist if capacity costs are very low. Capacities always fall short of the socially efficient level.

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Paper provided by Departmental Working Papers in its series Papers with number 016.

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Handle: RePEc:bef:lsbest:016
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  1. Reynolds, Stanley S. & Wilson, Bart J., 2000. "Bertrand-Edgeworth Competition, Demand Uncertainty, and Asymmetric Outcomes," Journal of Economic Theory, Elsevier, vol. 92(1), pages 122-141, May.
  2. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October.
  3. Paul L. Joskow, 2001. "California's Electricity Crisis," NBER Working Papers 8442, National Bureau of Economic Research, Inc.
  4. Berenstein, Severin & Bushnell, James & Stoft, Steven, 2000. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," Staff General Research Papers 13145, Iowa State University, Department of Economics.
  5. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  6. Castro-Rodriguez, Fidel & Marín, Pedro L. & Siotis, Georges, 2009. "Capacity choices in liberalised electricity markets," Energy Policy, Elsevier, vol. 37(7), pages 2574-2581, July.
  7. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
  8. Joskow, Paul L & Tirole, Jean, 1999. "Transmission Rights and Market Power on Electric Power Networks I: Financial Rights," CEPR Discussion Papers 2093, C.E.P.R. Discussion Papers.
  9. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
  10. Leautier, Thomas-Olivier, 2001. "Transmission Constraints and Imperfect Markets for Power," Journal of Regulatory Economics, Springer, vol. 19(1), pages 27-54, January.
  11. Severin Borenstein & James Bushnell & Christopher R. Knittel & Catherine Wolfram, 2001. "Trading Inefficiencies in California's Electricity Markets," NBER Working Papers 8620, National Bureau of Economic Research, Inc.
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