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Divesting power

  • Federico, Giulio

    ()

    (IESE Business School)

  • Lopez, Angel L.

    (IESE Business School)

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    We study alternative market power mitigation measures in a model where a dominant producer faces a competitive fringe with the same cost structure. We characterise the asset divestment by the dominant firm which achieves the greatest reduction in prices. This divestment entails the sale of marginal assets whose cost range encompasses the post-divestment price. A divestment of this type can be several times more effective in reducing prices than divestments of baseload (or low-cost) assets. We also establish that financial contracts (modeled as Virtual Power Plant schemes) are at best equivalent to baseload divestments in terms of consumer welfare.

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    Paper provided by IESE Business School in its series IESE Research Papers with number D/812.

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    Length: 35 pages
    Date of creation: 01 Aug 2009
    Date of revision:
    Handle: RePEc:ebg:iesewp:d-0812
    Contact details of provider: Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
    Web page: http://www.iese.edu/

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    1. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
    2. de Frutos, Maria-Angeles & Fabra, Natalia, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers 6756, C.E.P.R. Discussion Papers.
    3. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
    4. Richard Gilbert & David Newbery, 2008. "Analytical Screens for Electricity Mergers," Review of Industrial Organization, Springer, vol. 32(3), pages 217-239, May.
    5. James Bushnell, 2007. "Oligopoly equilibria in electricity contract markets," Journal of Regulatory Economics, Springer, vol. 32(3), pages 225-245, December.
    6. Christian Schultz, 2005. "Virtual Capacity and Competition," CESifo Working Paper Series 1487, CESifo Group Munich.
    7. Bert Willems, 2004. "Cournot Competition, Financial Option markets and Efficiency," Center for Economic Studies - Discussion papers ces0414, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
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