Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas

Eijkel, Remco van; Moraga-González, José L.

doi:10.2139/ssrn.1645202

Cited by 15 publications

(6 citation statements)

References 44 publications

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“…We amend the model by adding different support mechanisms for clean generation. The mechanism through which our model demonstrates the effect of subsidies on equilibrium market prices is similar to the one outlined in the literature on forward markets (e.g., Allaz and Vila, 1993;Wolak, 2003a;Bushnell et al, 2008;Van Koten and Ortmann, 2013;Eijkel et al, 2016;Ito and Reguant, 2016). Equivalent to forward contracts, clean generation that is rewarded by a fixed tariff reduces spot demand and thus prices.…”

Section: Introductionsupporting

confidence: 56%

Technology Policy and Market Structure: Evidence from the Power Sector

Bohland

Schwenen

2020

SSRN Journal

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We show how policies to trigger clean technologies change price competition and market structure. We present evidence from electricity markets, where regulators have implemented different policies to subsidize clean energy. Building on a multi-unit auction model, we show that currently applied subsidy designs either foster or attenuate competition. Fixed, price-independent output subsidies decrease firms' mark-ups. In contrast, designs that subsidize clean output via a regulatory premium on the market price lead to higher mark-ups. We confirm this finding empirically using auction data from the Spanish power market. Our empirical results show that the design choice for technology subsidies significantly impacts pricing behavior of firms and policy costs for consumers.

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Section: Introductionsupporting

confidence: 56%

Technology Policy and Market Structure: Evidence from the Power Sector

Bohland

Schwenen

2020

SSRN Journal

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“…Our study indicates that the design, or evolution, of such public forward exchanges as in France (and many other developed markets) should indeed be encouraged. Moreover, the public observability of forward positions is essential for the competition-increasing effect of Allaz and Vila (1993) to arise (Hughes and Kao, 1997;Van Eijkel and Moraga-Gonzalez, 2010).…”

Section: Resultsmentioning

confidence: 99%

Structural Versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns

Koten

Ortmann²

2012

SSRN Journal

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We try to better understand the comparative advantages of structural and behavioral remedies of deregulation in electricity markets, an eminent policy issue for which the experimental evidence is scant and problematic.Specifically, we investigate theoretically and experimentally the effects on competition of introducing a forward market which the European Commission classifies as a behavioral remedy. We compare this scenario with its best alternative, the structural remedy of adding one more competitor by divestiture. Our study contributes to the literature by introducing more realistic cost configurations, by teasing apart competition effect and asset effect, and by investigating competitor numbers that reflect the market concentration in the European electricity industries. Our experimental data suggest that introducing a forward market has a positive effect on the aggregate supply in markets with two or three major competitors, configurations typical for the newly accessed and the old European Union member states, respectively. Introducing a forward market also increases efficiency. 1 Corresponding author 2/101In contrast to previous findings, our data furthermore suggest that the effect of introducing a forward market is stronger than adding one more competitor. We thus provide evidence that behavioral remedies may be more effective than structural ones. Our data hence suggest that competition authorities are well advised, in line with EU law (European Commission, 2006a, p.11), to focus on introducing, and facilitating the proper functioning of, forward markets rather than on lowering market concentration by divestiture., -, -. Rearranging this equation yields , -( , -) ( ) (( ) ) ( , -, -) , -. 5/101when none of them had sold. This prisoner's-dilemma type result is standard textbook fare (e.g., Binmore 2007, chapter 10).Allaz and Vila (1993) model the competition as a one-shot game. The Nash equilibrium of a one-shot game and that of a repeated game with predictable ending are theoretically (albeit not necessarily behaviorally; see Selten (1978Selten ( , 1991 identical. This makes the Allaz and Vila model a fitting theoretical benchmark for an experiment with a fixed, or predictable, number of periods. Of course, in the real world the number of periods may not be fixed, or predictable, and the Nash equilibrium of the stage game is one of many equilibria, some of which may be collusive: see Liski and Montero (2006). Since all treatments have the same number of rounds, between-treatment results ought to be nonetheless informative.We compare the results of introducing a forward market with those of the best alternative remedy: reducing market concentration by divestiture. We do so for competitor numbers that arguably reflect better the market concentration in the old European states than previous literature has done. We also use realistic cost configurations and tease apart competition and asset effect.We show that, theoretically and behaviorally, the effects of introducing a forward market might be larger than...

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“…Our study suggests that forward markets could play a role in enhancing competition in concentrated markets and that the design, or evolution, of public forward exchanges such as in France (and many other developed markets) should indeed be encouraged. The public observability of forward positions is essential for the competitionincreasing effect of Allaz and Vila (1993) to arise (Hughes and Kao, 1997;Van Eijkel and Moraga-Gonzalez, 2010). Energy markets are, however, not very transparent as most trading takes place on…”

Section: /18mentioning

confidence: 99%

Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns

Koten

Ortmann

2013

European Economic Review

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We experimentally study the effects of introducing a forward market and of increasing the number of competitors in a quantity-setting market under strictly convex production costs. Our key interest is to better understand which of these two remedies is more effective at enhancing competition. Allaz and Vila (1993) theorized that forward markets can have a pro-competitive effect under linear production costs. Le Coq and Orzen (2006) and Brandts, Pezanis-Christou and Schram (2008) investigated this and related issues experimentally. All three experiments (including ours) support the prediction by Allaz and Vila (1993) that introducing a forward market does indeed intensify competition. The results of the present study, however, differ from previous experimental results in that we find the forward market to be the more effective remedy. Brandts et al. (2008) increase the number of competitors by entry, which thus increases the aggregate stock of production assets and makes output cheaper. In contrast, we increase the number of competitors by divestiture, which leaves the aggregate stock of production 2/18 assets constant. Our results address an important policy issue and provide tentative evidence on the competition-enhancing effect of forward markets, which can be considered a behavioral remedy.

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Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas

Cited by 15 publications

References 44 publications

Technology Policy and Market Structure: Evidence from the Power Sector

Technology Policy and Market Structure: Evidence from the Power Sector

Structural Versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns

Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns

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