Dynamic Competition and Arbitrage in Electricity Markets: The Role of Financial Traders

64 Pages Posted: 19 Nov 2018 Last revised: 24 May 2021

Date Written: March 9, 2021


I study the role of purely financial players in electricity markets, where they trade alongside physical buyers and sellers. In this context, physical sellers intertemporally price discriminate, leading to price differences that financial traders arbitrage, thus restricting producers' market power. Using detailed individual data, I examine physical and financial firms' response to regulation that exogenously increased financial trading. I show that the effect of financial traders on generators' market power depends on whether firms are in a static Nash equilibrium or not. I then develop a structural test of static Nash equilibrium and show the null of static Nash does not hold during the period of reduced financial trading. To implement the test, I present a new method to study the competitive structure of electricity markets using machine learning tools to define markets. I find that increased financial trading reduced generators' market power and increased consumer surplus.

Keywords: electricity markets, static Nash equilibrium, financial traders, market definition, machine learning

JEL Classification: L1, L9, Q4

Suggested Citation

Mercadal, Ignacia, Dynamic Competition and Arbitrage in Electricity Markets: The Role of Financial Traders (March 9, 2021). Available at SSRN: https://ssrn.com/abstract=3281886 or http://dx.doi.org/10.2139/ssrn.3281886

Ignacia Mercadal (Contact Author)

University of Florida ( email )

PO Box 117140
MAT 332
Gainesville, FL 32606
United States

HOME PAGE: http://https://sites.google.com/site/ignaciamercadal/

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