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

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