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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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    File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120050825112339.pdf
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    References listed on IDEAS

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    1. 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 929-953, October.
    2. Bergman, Lars & Andersson, Bo, 1995. "Market Structure and the Price of Electricity: An ex ante Analysis of the deregulated Swedish Electricity Market," SSE/EFI Working Paper Series in Economics and Finance 47, Stockholm School of Economics.
    3. 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.
    4. 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.
    5. Bo Andersson & Lars Bergman, 1995. "Market Structure and the Price of Electricity: An Ex Ante Analysis of the Deregulated Swedish Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 97-110.
    6. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    7. Soledad Arellano, 2004. "Market Power in Mixed Hydro-Thermal Electric," Documentos de Trabajo 187, Centro de Economía Aplicada, Universidad de Chile.
    8. M. Soledad Arellano, 2004. "Market Power in Mixed Hydro-Thermal Electric Systems," Econometric Society 2004 Latin American Meetings 211, Econometric Society.
    9. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-546, May.
    10. Paul L. Joskow, 1976. "Contributions to the Theory of Marginal Cost Pricing," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 197-206, Spring.
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    Cited by:

    1. Albert Banal-Estañol & Augusto Rupérez Micola, 2009. "Composition of Electricity Generation Portfolios, Pivotal Dynamics, and Market Prices," Management Science, INFORMS, pages 1813-1831.
    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.

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