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Long-Term Supply Contracts and Collusion in the Electricity Markets

  • Le Coq, Chloé

    ()

    (Dept. of Economics, Stockholm School of Economics)

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    It has been argued that having a contract market before the spot market enhances competition (Allaz and Vila, 1993). Taking into account the repeated nature of electricity markets, we check the robustness of the argument that the access to contract markets reduces the market power of generators. In particular, we investigate the sensitivity of this result with respect to the finite horizon assumption. This paper proposes a model of the electricity market where firms sign long-term supply contracts with their retailers. Subsequently, the firms repeatedly interact on the spot market. It is shown that contract markets help sustain collusion on the spot market.

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    File URL: http://swopec.hhs.se/hastef/papers/hastef0552.pdf
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    Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 552.

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    Length: 16 pages
    Date of creation: 28 May 2003
    Date of revision:
    Handle: RePEc:hhs:hastef:0552
    Contact details of provider: Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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    1. Schnitzer, Monika, 1994. "Dynamic duopoly with best-price clauses," Munich Reprints in Economics 3108, University of Munich, Department of Economics.
    2. Severin Borenstein & James Bushnell, 1998. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," NBER Working Papers 6463, National Bureau of Economic Research, Inc.
    3. Davidson, Carl & Deneckere, Raymond J, 1990. "Excess Capacity and Collusion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 521-41, August.
    4. Natalia Fabra, 2003. "Tacit Collusion in Repeated Auctions: Uniform Versus Discriminatory," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 271-293, 09.
    5. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
    6. Ronald W Anderson & Tiziano Brianza, 1991. "Cartel Behaviour and Futures Trading," CEPR Financial Markets Paper 0014, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
    7. Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 1-39.
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