Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets

Abstract

This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure. (JEL L11, L13, L94)

Complementary Bidding Mechanisms and Startup Costs in Electricity Markets

“…For multi-unit auctions, Hortaçsu and McAdams (2010) show that, under some assumptions, the distribution of valuations can be non-parametrically estimated even with data from a single auction. 4 which had been shown to exhibit a downward bias during night hours (Bushnell, Mansur and Saravia, 2008;Mansur, 2008). Finally, I show that the presence of startup costs limits the ability of a strategic firm to price discriminate across hours, with implied markups that are smoother than those obtained with a model without startup costs.…”

“…Bilateral production contracts are observed in the data because they need to be communicated to coordinate the operation of the electric system. Financial contracts are not observed, but they have been found to be a crucial factor in determining the optimal bids of the agents (Wolak, 2000;Bushnell, Mansur and Saravia, 2008). I estimate these contracts from the data in the empirical analysis, as in Wolak (2003), Hortaçsu and Puller (2008) and Allcott (2012).…”

Electric vehicles in imperfect electricity markets: The case of Germany

“…Hortaçsu andPuller (2008) andMansur (2008) empirically study market power problems in different U.S. electricity markets. Puller (2007) and Bushnell et al (2008) provide empirical support that Cournot pricing is a reasonable assumption for electricity market modeling. Weigt and Hirschhausen (2008) find empirical evidence of imperfect competition on the German power market.…”

“…The finding is in line with the theoretical work by Allaz and Vila (1993), according to which foreward contracted demand causes a strategic firm to increase output, which benefits this firm, but harms its competitors. Bushnell et al (2008) examine this effect in detail for restructured power markets.…”

Gone with the wind? — Electricity market prices and incentives to invest in thermal power plants under increasing wind energy supply

“…Lise et. al (2006), Traber and Kemfert (2007), Bushnell et al (2008), the model can assess different market behavior of important electricity suppliers: On the one hand, price taking perfect competitive behavior of all market participants, and, on the other hand, Cournot quantity setting behavior of large firms under competition of a price taking aggregate of fringe firms.…”