Escobari, Diego (2011): A theoretical model of collusion and regulation in an electricity spot market.
Download (106kB) | Preview
This paper presents a theoretical model of collusion and regulation in a wholesale electricity spot market. Given a demand for electricity, competing generators report their marginal costs. Then, only generators with the lowest marginal costs are selected to sell at a price equal to the marginal costs of the last generator selected to sell. The results show that under a fixed price level it is a weakly dominant strategy to truthfully report the marginal cost. Variable (or endogenous) prices create the possibility of profitable collusion among generators. With uncertainty in the marginal costs and risk neutrality, the results show that a necessary condition for collusion to be sustainable is that the marginal cost reported by the pivot (marginal generator) should be higher than the average of the true marginal costs of all the generators. The existence of collusion fines and audit probabilities were found to be effective in deterring collusion. It is also shown that more efficient generators have less incentive to collude.
|Item Type:||MPRA Paper|
|Original Title:||A theoretical model of collusion and regulation in an electricity spot market|
|Keywords:||Electricity; Regulation; Collusion.|
|Subjects:||K - Law and Economics > K2 - Regulation and Business Law > K20 - General
L - Industrial Organization > L4 - Antitrust Issues and Policies > L43 - Legal Monopolies and Regulation or Deregulation
D - Microeconomics > D4 - Market Structure and Pricing > D43 - Oligopoly and Other Forms of Market Imperfection
|Depositing User:||Diego Escobari|
|Date Deposited:||12. Jul 2011 12:26|
|Last Modified:||14. Feb 2013 20:11|
Becker, G. (1968). Crime and Punishment: an Economic Approach. Journal of Political Economy 76, 169-217.
Bushnell, J. and C.D. Wolfram (2005). Ownership Change, Incentives and Plant Efficiency: The Divestiture of U.S. Electric Generation Plants, mimeo, University of California Energy Institute.
Fischer, R. and Serra, P. (2000). Regulating the Electricity Sector in Latin America. Serie Economía No. 86, Centro de Economía Aplicada, Universidad de Chile.
Green, R.J. and D.M. Newbery (1992). Competition in the British Electricity Spot Market. Journal of Political Economy 100, 929-953.
Joskow, P.L. (1997). Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector. Journal of Economic Perspectives 11, 119-138.
Newbery, D.M. (1998). Competition, Contracts, and Entry in the Electricity Spot Market. Rand Journal of Economics 29, 726-749.
Puller, S.L. (2007). Pricing and Firm Conduct in California’s Deregulated Electricity Market. Review of Economics and Statistics 89, 75-87.
Steiner, F. (2001). Regulation, Industry Structure and Performance in the Electricity Supply Industry. OECD Economic Studies, 32.
van der Fehr, H-N.M. and D. Harbord (1993). Spot Market Competition in the U.K. Electricity Industry. Economic Journal 103, 531-546.
Wolfram, C.D. (1999). Measuring Duopoly Power in the British Electricity Spot Market. American Economic Review 89, 805-826.