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Predicting Market Power in Wholesale Electricity Markets

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  • David Newbery

Abstract

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.

Suggested Citation

  • David Newbery, 2009. "Predicting Market Power in Wholesale Electricity Markets," RSCAS Working Papers 2009/03, European University Institute.
  • Handle: RePEc:rsc:rsceui:2009/03
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    References listed on IDEAS

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    1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    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, 2011. "Do interest groups affect US immigration policy?," Journal of International Economics, Elsevier, vol. 85(1), pages 114-128, September.
    4. Blume, Lawrence, 2002. "Stigma and Social Control," Economics Series 119, Institute for Advanced Studies.
    5. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
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    Cited by:

    1. repec:eee:eneeco:v:66:y:2017:i:c:p:238-246 is not listed on IDEAS
    2. repec:eco:journ2:2018-01-22 is not listed on IDEAS
    3. Genc, Talat S., 2016. "Measuring demand responses to wholesale electricity prices using market power indices," Energy Economics, Elsevier, vol. 56(C), pages 247-260.
    4. VĂ­tor Marques & Adelino Fortunato & Isabel Soares, 2010. "Application of a structural model to a wholesale electricity market: The Spanish market from January 1999 to June 2007," GEMF Working Papers 2011-02, GEMF, Faculty of Economics, University of Coimbra.
    5. Vasin, A. & Daylova, E., 2013. "Analysis of the Short-Term Efficiency of Mechanisms of the Wholesale Electricity Market," Journal of the New Economic Association, New Economic Association, vol. 18(2), pages 35-60.
    6. repec:eee:eneeco:v:66:y:2017:i:c:p:450-465 is not listed on IDEAS
    7. Hesamzadeh, Mohammad R. & Biggar, Darryl R. & Hosseinzadeh, Nasser, 2011. "The TC-PSI indicator for forecasting the potential for market power in wholesale electricity markets," Energy Policy, Elsevier, vol. 39(10), pages 5988-5998, October.

    More about this item

    Keywords

    Residual Supply Index; Cournot equilibrium; Lerner Index; electricity markets; market power;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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