IDEAS home Printed from https://ideas.repec.org/p/enp/wpaper/eprg1210.html

Estimating Market Power in Homogeneous Product Markets Using a Composed Error Model: Application to the California Electricity Market

Author

Listed:
  • Luis Orea

    (University of Oviedo)

  • Jevgenijs Steinbuks

    (Steinbuks: Purdue University)

Abstract

This study contributes to the literature on estimating market power in homogenous product markets. We estimate a composed error model, where the stochastic part of the firm’s pricing equation is formed by two random variables: the traditional error term, capturing random shocks, and a random conduct term, which measures the degree of market power. Treating firms’ conduct as a random parameter helps solving the issue that the conduct parameter can vary between firms and within firms over time. The empirical results from the California wholesale electricity market suggest that realization of market power varies over both time and firms, and reject the assumption of a common conduct parameter for all firms. Notwithstanding these differences, the estimated firm-level values of the conduct parameter are closer to Cournot than to static collusion across all specifications. For some firms, the potential for realization of the market power unilaterally is associated with lower values of the conduct parameter.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Luis Orea & Jevgenijs Steinbuks, 2012. "Estimating Market Power in Homogeneous Product Markets Using a Composed Error Model: Application to the California Electricity Market," Working Papers EPRG 1210, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:eprg1210
    as

    Download full text from publisher

    File URL: https://www.jbs.cam.ac.uk/wp-content/uploads/2023/12/eprg-wp1210.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kutlu, Levent & Sickles, Robin & Tsionas, Mike G., 2019. "Heterogeneous Decision-Making and Market Power," Working Papers 19-008, Rice University, Department of Economics.
    2. Sickles, Robin C. & Hao, Jiaqi & Shang, Chenjun, 2015. "Panel Data and Productivity Measurement," Working Papers 15-018, Rice University, Department of Economics.
    3. Wan, Yi & Kober, Tom & Densing, Martin, 2022. "Nonlinear inverse demand curves in electricity market modeling," Energy Economics, Elsevier, vol. 107(C).
    4. Levent Kutlu & Robin C. Sickles & Mike G. Tsionas & Emmanuel Mamatzakis, 2022. "Correction to: Heterogeneous decision-making and market power: an application to Eurozone banks," Empirical Economics, Springer, vol. 63(6), pages 3093-3093, December.
    5. Meryem Duygun & Jiaqi Hao & Anders Isaksson & Robin C. Sickles, 2017. "World Productivity Growth: A Model Averaging Approach," Pacific Economic Review, Wiley Blackwell, vol. 22(4), pages 587-619, October.
    6. Robert Germeshausen & Timo Panke & Heike Wetzel, 2020. "Firm characteristics and the ability to exercise market power: empirical evidence from the iron ore market," Empirical Economics, Springer, vol. 58(5), pages 2223-2247, May.
    7. Dibyendu Maiti & Chiranjib Neogi, 2024. "Endogeneity-corrected stochastic frontier with market imperfections," Empirical Economics, Springer, vol. 67(3), pages 1149-1183, September.
    8. Yuri Matsumura & Suguru Otani, 2023. "Challenges in Statistically Rejecting the Perfect Competition Hypothesis Using Imperfect Competition Data," Papers 2310.04576, arXiv.org, revised Aug 2024.
    9. Kutlu, Levent & Tran, Kien C. & Tsionas, Mike G., 2020. "A spatial stochastic frontier model with endogenous frontier and environmental variables," European Journal of Operational Research, Elsevier, vol. 286(1), pages 389-399.
    10. Mustafa U. Karakaplan & Levent Kutlu, 2019. "Estimating market power using a composed error model," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(4), pages 489-510, September.
    11. Bhattacharyya, Aditi & Kutlu, Levent & Sickles, Robin C., 2018. "Pricing Inputs and Outputs: Market prices versus shadow prices, market power, and welfare analysis," Working Papers 18-009, Rice University, Department of Economics.
    12. Kutlu, Levent & Tran, Kien C. & Tsionas, Mike G., 2019. "A time-varying true individual effects model with endogenous regressors," Journal of Econometrics, Elsevier, vol. 211(2), pages 539-559.
    13. Mydland, Ørjan & Størdal, Ståle & Kumbhakar, Subal C. & Lien, Gudbrand, 2022. "Modeling markups and its determinants: The case of Norwegian industries and regions," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 252-262.
    14. Ruiz-Moreno, Felipe & Mas-Ruiz, Francisco J. & Sancho-Esper, Franco M., 2021. "Strategic groups and product differentiation: Evidence from the Spanish airline market deregulation," Research in Transportation Economics, Elsevier, vol. 90(C).
    15. Chiara Lo Prete & Benjamin F. Hobbs, 2015. "Market Power in Power Markets: An Analysis of Residual Demand Curves in California’s Day-ahead Energy Market (1998-2000)," The Energy Journal, , vol. 36(2), pages 191-218, April.
    16. Chiara Lo Prete and Benjamin F. Hobbs, 2015. "Market power in power markets: an analysis of residual demand curves in Californias day-ahead energy market (1998-2000)," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    17. Devin Garcia & Levent Kutlu & Robin C. Sickles, 2022. "Market Structures in Production Economics," Springer Books, in: Subhash C. Ray & Robert G. Chambers & Subal C. Kumbhakar (ed.), Handbook of Production Economics, chapter 13, pages 537-574, Springer.
    18. Sapio, Alessandro & Spagnolo, Nicola, 2016. "Price regimes in an energy island: Tacit collusion vs. cost and network explanations," Energy Economics, Elsevier, vol. 55(C), pages 157-172.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:enp:wpaper:eprg1210. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ruth Newman (email available below). General contact details of provider: https://edirc.repec.org/data/jicamuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.