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Vertical Integration and Long-Term Contracts in Risky Markets

Author

Listed:
  • Baldursson , Fridrik M.

    (University of Iceland)

  • von der Fehr, Nils-Henrik

    (Dept. of Economics, University of Oslo)

Abstract

We consider the effects of vertical integration on the performance of long-term and spot markets when spot prices are uncertain and agents are risk averse. We find that vertical integration impairs market performance by increasing the gap between contract and (expected) spot prices. This holds regardless of whether retail prices are fixed or linked to spot prices. Depending upon the characteristics of demand and supply, vertical integration (and long-term contracting) may increase or decrease spot-price volatility.

Suggested Citation

  • Baldursson , Fridrik M. & von der Fehr, Nils-Henrik, 2007. "Vertical Integration and Long-Term Contracts in Risky Markets," Memorandum 01/2007, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2007_001
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    File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2007/Memo-01-2007.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. David P. Brown & David E. M. Sappington, 2022. "Vertical integration and capacity investment in the electricity sector," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 193-226, February.
    2. Downward, Anthony & Young, David & Zakeri, Golbon, 2016. "Electricity retail contracting under risk-aversion," European Journal of Operational Research, Elsevier, vol. 251(3), pages 846-859.
    3. Parlane, Sarah & Ryan, Lisa, 2020. "Optimal contracts for renewable electricity," Energy Economics, Elsevier, vol. 91(C).
    4. Anette Boom & Stefan Buehler, 2020. "Vertical structure and the risk of rent extraction in the electricity industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 210-237, January.
    5. Willems, Bert & Morbee, Joris, 2010. "Market completeness: How options affect hedging and investments in the electricity sector," Energy Economics, Elsevier, vol. 32(4), pages 786-795, July.
    6. Boom, Anette, 2009. "Vertically integrated firms' investments in electricity generating capacities," International Journal of Industrial Organization, Elsevier, vol. 27(4), pages 544-551, July.

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    More about this item

    Keywords

    Vertical integration; long-term contracts; spot markets; risk aversion; electricity markets;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

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