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Incentives and Coordination in Vertically Related Energy Markets

  • Augusto Rupérez Micola
  • Albert Banal Estañol
  • Derek W. Bunn

We present an agent-based model of a multi-tier energy market including gas shippers, electricity generators and retailers. We show how reward interdependence between strategic business units within a vertically integrated firm can increase its profits in oligopolistic energy markets. The effects are shown to be distinct from those of the raising rivals’ costs model. In our case, higher prices relate to the nature of energy markets, which facilitate the emergence of financial netback effects. ZUSAMMENFASSUNG - (Anreize und Koordination in vertikal integrierten Energiemärkten) Es wird ein Agenten-basiertes Modell eines Energiemarktes mit mehreren Ebenen der Wertschöpfungskette vorgestellt, das Gaslieferanten, Stromerzeuger und Händler berücksichtigt. Es kann gezeigt werden, wie ein vertikal integriertes Unternehmen, das auf oligopolistischen Energiemärkten agiert, die Honorierungsbeziehungen zwischen strategischen Geschäftsbereichen nutzen kann, um seine Gewinne zu steigern. Üblicherweise versuchen Firmen, die die gesamte Wertschöpfungskette integriert haben, ihren Vorteil dadurch zu nutzen, dass sie die Kosten der Wettbewerber durch Preisdiskriminierung erhöhen und den Markt gegen sie abschotten. Das ist in Energiemärkten nicht möglich. Im vorgestellten Modell wird ein Mechanismus gewählt, der den Charakteristika von Energiemärkten angepasst ist, um über Anreize denselben Endeffekt zu erzielen. Dieser beruht aber nicht auf der Marktabschottung, sondern auf einem finanziellen Valorisierungseffekt, bei dem Unternehmensbereiche am Beginn der Wertschöpfungskette die Preisspannen für die Unternehmensteile am oberen Ende vorgeben.

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Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number SP II 2006-02.

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Length: 17 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:wzb:wzebiv:spii2006-02
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  1. David F. Midgley & Robert E. Marks & Lee G. Cooper, 1995. "Breeding Competitive Strategies," Working Papers 95-06-052, Santa Fe Institute.
  2. Granitz, Elizabeth & Klein, Benjamin, 1996. "Monopolization by "Raising Rivals' Costs": The Standard Oil Case," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 1-47, April.
  3. Smith, Vernon L, et al, 1982. "Competitive Market Institutions: Double Auctions vs. Sealed Bid-Offer Auctions," American Economic Review, American Economic Association, vol. 72(1), pages 58-77, March.
  4. Ching-To Albert Ma, 1997. "Option Contracts and Vertical Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 725-753, December.
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  6. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  8. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  9. David M. Newbery, 2002. "Privatization, Restructuring, and Regulation of Network Utilities," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640481, June.
  10. Kühn, Kai-Uwe & Machado, Matilde Pinto, 2004. "Bilateral Market Power and Vertical Integration in the Spanish Electricity Spot Market," CEPR Discussion Papers 4590, C.E.P.R. Discussion Papers.
  11. Roth, Alvin E. & Erev, Ido, 1995. "Learning in extensive-form games: Experimental data and simple dynamic models in the intermediate term," Games and Economic Behavior, Elsevier, vol. 8(1), pages 164-212.
  12. Hunger, David, 2003. "Analyzing Gas and Electric Convergence Mergers: A Supply Curve Is Worth a Thousand Words," Journal of Regulatory Economics, Springer, vol. 24(2), pages 161-73, September.
  13. Tesfatsion, Leigh & Judd, Kenneth L., 2006. "Handbook of Computational Economics, Vol. 2: Agent-Based Computational Economics," Staff General Research Papers 10368, Iowa State University, Department of Economics.
  14. Bushnell, James & Mansur, Erin T. & Saravia, Celeste, 2008. "Vertical Arrangements, Market Structure and Competition: An Analysis of Restructured U.S. Electricity Markets," Staff General Research Papers 13130, Iowa State University, Department of Economics.
  15. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-46, May.
  16. Riordan, Michael H, 1998. "Anticompetitive Vertical Integration by a Dominant Firm," American Economic Review, American Economic Association, vol. 88(5), pages 1232-48, December.
  17. Nicolaisen, James & Petrov, Valentin & Tesfatsion, Leigh S., 2001. "Market Power and Efficiency in a Computational Electricity Market with Discriminatory Double-Auction Pricing," Staff General Research Papers 2050, Iowa State University, Department of Economics.
  18. Jay Pil Choi & Sang-Seung Yi, 2000. "Vertical Foreclosure with the Choice of Input Specifications," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 717-743, Winter.
  19. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-42, March.
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