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Pivotal Suppliers and Market Power in Experimental Supply Function Competition

Author

Listed:
  • Jordi Brandts

    (Universitat Autonoma de Barcelona)

  • Stanley S. Reynolds

    (University of Arizona)

  • Arthur Schram

    (University of Amsterdam)

Abstract

This discussion paper resulted in a publication in the Economic Journal (2014). Volume 124, pages 887-916. In the process of regulatory reform in the electric power industry, the mitigation of market power is one of the basic problems regulators have to deal with. We use experimental data to study the sources of market power with supply function competition, akin to the competition in wholesale electricity markets. An acute form of market power may arise if a supplier is pivotal; that is, if the supplier's capacity is required in order to meet demand. To be able to isolate the impact of demand and capacity conditions on market power, our treatments vary the distribution of demand levels as well as the amount and symmetry of the allocation of production capacity between different suppliers. We relate our results to a descriptive power index and to the predictions of two alternative models: a supply function equilibrium (SFE) model and a multi-unit auction (MUA) model. We find that pivotal suppliers do indeed exercise their market power in the experiments. We also find that observed behavior is consistent with the range of equilibria of the unrestricted SFE model and inconsistent with the unique equilibria of two refinements of the SFE model and of the MUA model.

Suggested Citation

  • Jordi Brandts & Stanley S. Reynolds & Arthur Schram, 2011. "Pivotal Suppliers and Market Power in Experimental Supply Function Competition," Tinbergen Institute Discussion Papers 11-033/1, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20110033
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    References listed on IDEAS

    as
    1. Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2008. "Competition with forward contracts: a laboratory analysis motivated by electricity market design," Economic Journal, Royal Economic Society, vol. 118(525), pages 192-214, January.
    2. Armin Falk & James J. Heckman, 2009. "Lab Experiments are a Major Source of Knowledge in the Social Sciences," Working Papers 200935, Geary Institute, University College Dublin.
    3. repec:cto:journl:v:21:y:2002:i:3:p:515-544 is not listed on IDEAS
    4. Bolle, Friedel, 2001. "Competition with supply and demand functions," Energy Economics, Elsevier, vol. 23(3), pages 253-277, May.
    5. David M. Newbery, 1998. "Competition, Contracts, and Entry in the Electricity Spot Market," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 726-749, Winter.
    6. Ilan Kremer & Kjell G. Nyborg, 2004. "Divisible-Good Auctions: The Role of Allocation Rules," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 147-159, Spring.
    7. Ahmed Anwar, 1999. "The Case for a Discriminatory Pricing Rule in Competitive Electricity Pools," ESE Discussion Papers 39, Edinburgh School of Economics, University of Edinburgh.
    8. Ali Hortaçsu & Steven L. Puller, 2008. "Understanding strategic bidding in multi-unit auctions: a case study of the Texas electricity spot market," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 86-114.
    9. Ross Baldick & Ryan Grant & Edward Kahn, 2004. "Theory and Application of Linear Supply Function Equilibrium in Electricity Markets," Journal of Regulatory Economics, Springer, vol. 25(2), pages 143-167, March.
    10. Genc, Talat S. & Reynolds, Stanley S., 2011. "Supply function equilibria with capacity constraints and pivotal suppliers," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 432-442, July.
    11. Carine Staropoli & Céline Jullien, 2006. "Using Laboratory Experiments To Design Efficient Market Institutions: The Case Of Wholesale Electricity Markets," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 555-577, December.
    12. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-124, March.
    13. Newbery, David M., 2002. "Problems of liberalising the electricity industry," European Economic Review, Elsevier, vol. 46(4-5), pages 919-927, May.
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    Citations

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    Cited by:

    1. Bayona, Anna & Brandts, Jordi & Vives, Xavier, 2016. "Supply Function Competition, Private Information, and Market Power: A Laboratory Study," CEPR Discussion Papers 11378, C.E.P.R. Discussion Papers.
    2. Manzano, Carolina & Vives, Xavier, 2016. "Market Power and Welfare in Asymmetric Divisible Good Auctions," CEPR Discussion Papers 11731, C.E.P.R. Discussion Papers.
    3. repec:kap:regeco:v:53:y:2018:i:2:d:10.1007_s11149-018-9354-1 is not listed on IDEAS
    4. repec:eee:jetheo:v:175:y:2018:i:c:p:318-341 is not listed on IDEAS
    5. Anderson, Edward & Holmberg, Pär, 2018. "Price instability in multi-unit auctions," Journal of Economic Theory, Elsevier, vol. 175(C), pages 318-341.
    6. repec:eee:eneeco:v:66:y:2017:i:c:p:450-465 is not listed on IDEAS
    7. Chloé Coq & Henrik Orzen & Sebastian Schwenen, 2017. "Pricing and capacity provision in electricity markets: an experimental study," Journal of Regulatory Economics, Springer, vol. 51(2), pages 123-158, April.

    More about this item

    Keywords

    Market Power; Electric Power Markets; Pivotal Suppliers; Experiments;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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