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Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets

  • Borenstein, Severin

Discussions of competition in restructured electricity markets have revealed many misunderstandings about the definition, diagnosis, and implications of market power. In this paper, I attempt to clarify the meaning of market power and show how it can be distinguished from competitive pricing in markets with significant short-run supply constraints. I also address two common myths about market power: (a) that it is present in all markets and (b) that it must be present in order for firms to remain profitable in markets with significant fixed costs. I conclude by arguing that, while a finding of market power in an industry does not necessarily indicate that government intervention is warranted, such analysis is an important part of creating sound public policy.

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Paper provided by Competition Policy Center, Institute for Business and Economic Research, UC Berkeley in its series Competition Policy Center, Working Paper Series with number qt00p2p3wv.

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Date of creation: 02 Aug 1999
Date of revision:
Handle: RePEc:cdl:compol:qt00p2p3wv
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