Vertical Integration and Capacity Competition in Electricity Markets

28 Pages Posted: 11 Sep 2008

See all articles by Rowan Walshaw

Rowan Walshaw

affiliation not provided to SSRN

Kieron Meagher

Australian National University (ANU)

Date Written: March 29, 2005

Abstract

This paper characterises the impact of vertical integration on price equilibria and incentives to strategically withhold capacity in a wholesale electricity auction. A two-stage game is analysed where vertically integrated firms first declare the quantity of electricity available and then compete in a uniform price auction. Consistent with empirical literature on electricity markets, the model finds that firms' incentives are determined by their net demand position in the market. Results indicate that for the majority of parameter values, a vertically integrated structure yields a greater occurrence of competitive pricing in the wholesale market. Contrary to recent analysis of non-integration, vertical integration eliminates incentives for strategic capacity withholding.

Keywords: Vertical integration, capacity withholding, electricity, uniform price auction

JEL Classification: D24, L13, L22, L94, Q41

Suggested Citation

Walshaw, Rowan and Meagher, Kieron, Vertical Integration and Capacity Competition in Electricity Markets (March 29, 2005). Available at SSRN: https://ssrn.com/abstract=1266387 or http://dx.doi.org/10.2139/ssrn.1266387

Rowan Walshaw

affiliation not provided to SSRN

Kieron Meagher (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia