Oligopoly and Oligopsony Power in the Swedish Market
We generalize Wirl’s (JEEM, 2009) “oligopoly meets oligopsony” model of a permit market for the case of heterogeneous players. Both oligopolists and oligopsonists reduce welfare by restricting trade. Having both in the market reinforces this. However, oligopolists seek to increase the price whereas oligopsonists seek to decrease the price. Having both in the market leads to ambiguous results for the permit price, and hence for the trading positions of individual agents. We apply the model to the so-called Swedish market, on which non-ETS emission allowances are traded between the 27 EU Member States. The numerical results are partly as expected: Market power restricts total trade and reduce total welfare, regardless of whether there are strategic buyers, strategic sellers, or both. The impact on the permit price is ambiguous. Strategic buyers primarily affect the welfare of strategic sellers, and vice versa, whereas fringe agents may well benefit from having both strategic buyers and sellers (relative to having either).
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