Electricity Market Mergers with Endogenous Forward Contracting

28 Pages Posted: 13 Jul 2016

See all articles by David Brown

David Brown

University of Alberta - Department of Economics

Andrew Eckert

University of Alberta - Department of Economics

Date Written: July 12, 2016

Abstract

We analyze the effects of electricity market mergers in an environment where firms endogenously choose their level of forward contracts prior to competing in the wholesale market. We apply our model to Alberta’s wholesale electricity market. Firms have an incentive to reduce their forward contract coverage in the more concentrated post-merger equilibrium. We demonstrate that endogenous forward contracting magnifies the price increasing impacts of mergers, resulting in larger reductions in consumer surplus. Current market screening procedures used to analyze electricity mergers consider firms’ preexisting forward commitments. We illustrate that ignoring the endogenous nature of firms’ forward commitments can yield biased conclusions regarding the impacts of market structure changes such as mergers. In particular, we show that the price effects of mergers can be largely underestimated when forward contract quantities are held at pre-merger levels. Whether the profits of the merged firm are greater with fixed or endogenous forward quantities is ambiguous.

Keywords: Electricity, Mergers, Forward Contracts, Market Power, Regulation

JEL Classification: D43, L40, L51, L94, Q40

Suggested Citation

Brown, David and Eckert, Andrew, Electricity Market Mergers with Endogenous Forward Contracting (July 12, 2016). USAEE Working Paper No. 16-262, Available at SSRN: https://ssrn.com/abstract=2808637 or http://dx.doi.org/10.2139/ssrn.2808637

David Brown (Contact Author)

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

Andrew Eckert

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

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