Competitive Equilibrium in the Italian Wholesale Electricity Market

Abstract

The market power analysis in electricity market is relevant for understanding the competitive development of the industry’s restructuring and the liberalization process. The paper analyzes the market power exercised by power generators in the Italian wholesale electricity market. Following the approach of Wolak (2003, 2009), the extent of market power is measured using the Lerner index computed as the inverse of arc elasticity of the residual demand faced by each Cournot competitors. Then, the market supply curves have been adjusted to entail market power effects and the new market resolutions were derived. The new equilibrium prices are the competitive ones and represent the market clearing price that would have been if the electricity market was competitive and the effects of unilateral market power were removed.

Keywords: Market Power, Residual Demand,Lerner Index, Transmission Consraint

JEL Classification: D43