The Ideal Competitive Electricity Market. A Simulation for Italy
43 Pages Posted: 9 Jul 2019 Last revised: 25 Sep 2019
Date Written: December 29, 2017
Liberalization in the electricity markets has been characterized by oligopoly conditions and exercise of market power, largely studied in the empirical literature on the supply side. This paper provides a new contribution to the literature on the electricity market presenting a theoretical and empirical model to construct a competitive equilibrium, estimating market power both on the supply and demand side of the day-ahead electricity market. This model provides a useful analysis tool for the policy-maker to implement pro-competitive regulation, explicitly measuring the welfare loss associated with non-competitive market conditions. Results show the effect of non-competitive equilibria for the hourly markets in the period 2013-2014. In an ideal competitive market, prices would be lower than historical prices by about 2-5% and quantities would be higher by about 0.5-1%.
Keywords: electricity market, competitive equilibrium analysis, market power, oligopoly, residual demand and supply function, oligopsony, dead weight loss
JEL Classification: D01, D43, L13, L81, Q41
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