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Market Power in Price-Regulated Power Industries

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  • M. Soledad Arellano
  • Pablo Serra

Abstract

This paper analyzes market power in price-regulated power industries. We derive market equilibrium under different assumptions (perfect competition, monopoly, Cournot, etc.), with and without free entry. We show that when peak-load pricing is used, producers can exercise market power by increasing the share of peaking technology in the generation portfolio, compared to the welfare-maximizing configuration. In this framework natural measure of market power is the length of time that peaking technology plants operate beyond their operational time in the welfare maximizing solution. We show that when there is free entry with an exogenous fixed entry cost that is later sunk, more intense competition results in higher welfare but fewer firms.

Suggested Citation

  • M. Soledad Arellano & Pablo Serra, 2005. "Market Power in Price-Regulated Power Industries," Documentos de Trabajo 208, Centro de Economía Aplicada, Universidad de Chile.
    • Handle: RePEc:edj:ceauch:208
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    References listed on IDEAS

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    6. Borenstein, Severin & Bushnell, James & Kahn, Edward & Stoft, Steven, 1995. "Market power in California electricity markets," Utilities Policy, Elsevier, vol. 5(3-4), pages 219-236.
    7. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057, Elsevier.
    8. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    9. Soledad Arellano, 2004. "Market Power in Mixed Hydro-Thermal Electric," Documentos de Trabajo 187, Centro de Economía Aplicada, Universidad de Chile.
    10. M. Soledad Arellano, 2004. "Market Power in Mixed Hydro-Thermal Electric Systems," Econometric Society 2004 Latin American Meetings 211, Econometric Society.
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    Cited by:

    1. Arnold Rivasplata R. & Raúl García C., 2018. "Dinámica de inversión y competencia en generación eléctrica en un escenario de liberalización en el Perú: La importancia de los contratos de largo plazo," Documentos de Trabajo / Working Papers 2018-457, Departamento de Economía - Pontificia Universidad Católica del Perú.
    2. Arellano, M. Soledad & Serra, Pablo, 2008. "The competitive role of the transmission system in price-regulated power industries," Energy Economics, Elsevier, vol. 30(4), pages 1568-1576, July.
    3. Albert Banal-Estañol & Augusto Rupérez Micola, 2009. "Composition of Electricity Generation Portfolios, Pivotal Dynamics, and Market Prices," Management Science, INFORMS, vol. 55(11), pages 1813-1831, November.

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