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Strategic Reneging and Market Power in Sequential Markets

Benatia, David and Billette de Villemeur, Etienne (2019): Strategic Reneging and Market Power in Sequential Markets.

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This paper investigates the incentives for firms with market power to manipulate markets by strategically reneging on forward commitments. We first study the behaviour of a dominant firm in a two-period model with demand uncertainty. We then use the model’s predictions and a machine learning approach to investigate multiple occurrences of reneging on long-term commitments in Alberta’s electricity market in 2010-2011. We find that a supplier significantly increased its revenues by strategically reneging on its capacity availability obligations, causing Alberta’s annual electricity procurement costs to increase by as much as $600 million (+17%).

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