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http://ssrn.com/abstract=734463
 
 

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Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured U.S. Electricity Markets


James Bushnell


University of California Energy Institute; University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)

Erin T. Mansur


Dartmouth College - Dartmouth Economics Department; National Bureau of Economic Research (NBER)

Celeste Saravia


Cornerstone Research

February 15, 2005

Yale SOM Working Paper No. ES-40
UC Energy Institute CSEM Working Paper No. 126

Abstract:     
This paper examines the relative importance of horizontal market structure, auction design, and vertical arrangements in explaining electricity prices. We define vertical arrangements as either vertical integration or long term contracts whereby retail prices are determined prior to wholesale prices. This is generally the case in electricity markets. These ex ante retail price commitments mean that a producer has effectively entered into a forward contract when it takes on retail customers. The integrated firm has less incentive to raise wholesale prices when its sale price is constrained. For three restructured wholesale electricity markets, we simulate two sets of prices that define the bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Simulated prices that assume Cournot behavior but ignore this vertical scope vastly exceed observed prices. After accounting for the arrangements, performance is similar to Cournot in each market. Our results indicate that auction design has done little to limit strategic behavior and that horizontal market structure accurately predicts market performance only when vertical structure is also taken into account.

Number of Pages in PDF File: 49

Keywords: Vertical Arrangements, Market Power, Oligopoly, Electricity Markets

JEL Classification: L11, L13, L94

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Date posted: June 8, 2005  

Suggested Citation

Bushnell, James and Mansur, Erin T. and Saravia, Celeste, Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured U.S. Electricity Markets (February 15, 2005). ; UC Energy Institute CSEM Working Paper No. 126. Available at SSRN: http://ssrn.com/abstract=734463

Contact Information

James Bushnell
University of California Energy Institute ( email )
2539 Channing Way
Berkeley, CA 94720-5180
United States
(510) 642-9590 ext. 213 (Phone)
(510) 643-5180 (Fax)
University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)
IEOR Department
4135 Etcheverry Hall
Berkeley, CA 94720
United States
Erin T. Mansur (Contact Author)
Dartmouth College - Dartmouth Economics Department ( email )
Hanover, NH 03755
United States
603 646 2531 (Phone)
603 646 2122 (Fax)
HOME PAGE: http://www.dartmouth.edu/~mansur/
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Celeste Saravia
Cornerstone Research ( email )
1000 El Camino Real
Menlo Park, CA 94025-4327
United States
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