Competition, Contracts and Entry in the Electricity Spot Market
The supply function model of the English electricity spot market is extended to include equilibrium in a contract market in the presence of entry threats, both of which have dramatic effects on the determination of equilibrium. The paper presents an analytically tractable model which can be solved with contracts, variable numbers of competitors, and capacity constraints. In a well-defined case, capacity binds and entrants have a comparative advantage in nvestment, otherwise their entry threat constrains prices, but consumers would prefer more incumbents.
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