Strategic Reneging and Market Power in Sequential Markets

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

Abstract

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%).

• Item Type: MPRA Paper
• Language: English
• Keywords: Strategic Outages; Market Manipulation; Functional Data Analysis,; Wind Curtailment
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly ; Monopolization Strategies; L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L94 - Electric Utilities

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