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Pivotal Suppliers and Market Power in Experimental Supply Function Competition

Tinbergen Institute Discussion Paper 11-033/1

48 Pages Posted: 15 Feb 2011  

Jordi Brandts

Instituto de Analisis Economico (CSIC) Barcelona

Stanley S. Reynolds

University of Arizona - Department of Economics

Arthur J. H. C. Schram

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute

Date Written: January 31, 2011

Abstract

In the process of regulatory reform in the electric power industry, the mitigation of market power is one of the basic problems regulators have to deal with. We use experimental data to study the sources of market power with supply function competition, akin to the competition in wholesale electricity markets. An acute form of market power may arise if a supplier is pivotal; that is, if the supplier's capacity is required in order to meet demand. To be able to isolate the impact of demand and capacity conditions on market power, our treatments vary the distribution of demand levels as well as the amount and symmetry of the allocation of production capacity between different suppliers. We relate our results to a descriptive power index and to the predictions of two alternative models: a supply function equilibrium (SFE) model and a multi-unit auction (MUA) model. We find that pivotal suppliers do indeed exercise their market power in the experiments. We also find that observed behavior is consistent with the range of equilibria of the unrestricted SFE model and inconsistent with the unique equilibria of two refinements of the SFE model and of the MUA model.

Keywords: Market Power, Electric Power Markets, Pivotal Suppliers, Experiments

JEL Classification: C92, D43, L11, L94

Suggested Citation

Brandts, Jordi and Reynolds, Stanley S. and Schram, Arthur J. H. C., Pivotal Suppliers and Market Power in Experimental Supply Function Competition (January 31, 2011). Tinbergen Institute Discussion Paper 11-033/1. Available at SSRN: https://ssrn.com/abstract=1761335 or http://dx.doi.org/10.2139/ssrn.1761335

Jordi Brandts (Contact Author)

Instituto de Analisis Economico (CSIC) Barcelona ( email )

UAB Campus
E-08193 Bellaterra
Spain

Stanley S. Reynolds

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States
(520) 621-6251 (Phone)
(520) 626-4623 (Fax)

Arthur J. H. C. Schram

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 18
CREED
Amsterdam 1018 WB
Netherlands
+31 (0)20 525 4293 (Phone)

HOME PAGE: http://www.fee.uva.nl/creed/PEOPLE/Arthurs.htm

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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