The Extent of the Market and Integration Through Factor Markets: Evidence from Wholesale Electricity

63 Pages Posted: 17 Jul 2017 Last revised: 21 Mar 2018

Date Written: March 16, 2018

Abstract

We document the influence of factor markets in determining the extent of the market, by appealing to the Mundell Hypothesis that trade in goods markets and factor markets are substitutes. We confirm this influence using the U.S. wholesale market for electric power. Although the Eastern, Western, and Texas regions cannot trade electricity, inputs such as natural gas move freely across these regions. Through both a set of price transmission ratios, and a supply model for natural gas, we find regional electricity shocks do propagate across regions. We conclude output markets institutionally in autarky are economically integrated through factor markets.

Keywords: market integration, extent of the market, factor prices, factor mobility, wholesale electricity, natural gas, price transmission ratio

JEL Classification: C32, L94, Q41

Suggested Citation

Butters, R. and Spulber, Daniel F., The Extent of the Market and Integration Through Factor Markets: Evidence from Wholesale Electricity (March 16, 2018). Kelley School of Business Research Paper No. 17-50. Available at SSRN: https://ssrn.com/abstract=2999989 or http://dx.doi.org/10.2139/ssrn.2999989

R. Butters (Contact Author)

Indiana University ( email )

1309 E. Tenth St.
Bloomington, IN 47405
United States

HOME PAGE: http://https://kelley.iu.edu/BEPP/faculty/page14113.cfm?ID=46947

Daniel F. Spulber

Northwestern University - Kellogg School of Management ( email )

Kellogg Global Hub
2211 Campus Dr.
Evanston, IL 60208
United States
847-491-8675 (Phone)
847-467-1777 (Fax)

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