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Predicting Market Power in Wholesale Electricity Markets

  • David Newbery

The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.

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File URL: http://hdl.handle.net/1814/10620
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File URL: http://hdl.handle.net/1814/10620
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Paper provided by European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS) in its series EUI-RSCAS Working Papers with number 3.

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Date of creation: 15 Feb 2009
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Handle: RePEc:erp:euirsc:p0205
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  1. Blume, Lawrence, 2002. "Stigma and Social Control," Economics Series 119, Institute for Advanced Studies.
  2. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
  3. Facchini, Giovanni & Mayda, Anna Maria & Mishra, Prachi, 2008. "Do Interest Groups Affect US Immigration Policy?," CEPR Discussion Papers 6898, C.E.P.R. Discussion Papers.
  4. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
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