Working Paper: CEPR ID: DP4590
Authors: Kaiuwe Khn; Matilde Machado
Abstract: The Spanish electricity spot market is highly concentrated both on the seller and the buyer side. Furthermore, unlike electricity spot markets in other deregulated electricity systems, large buyers and sellers are typically vertically integrated. This allows both large net sellers and large net buyers to strategically influence the spot market price. We develop a supply function model of this market to analyse the impact of market power on prices and productive efficiency and use it empiricially to detect such bilateral market power. Our estimates suggest that market power has had little impact on spot market prices but that substantial productive inefficiencies may have arisen from the exercise of bilateral market power.
Keywords: bilateral market power; electricity markets; market power test; supply function equilibrium; vertical integration
JEL Codes: L13; L41; L94
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High concentration of market shares among a few firms (L13) | Exercise of bilateral market power (D42) |
| Exercise of bilateral market power (D42) | Affects pricing strategies of firms (L11) |
| Firms with net demand positions (G21) | Overproduce to lower spot market prices (L11) |
| Firms with net suppliers (D21) | Underproduce to increase prices (L11) |
| Market power (L11) | Substantial productive inefficiencies (D24) |
| Bilateral market power (D42) | Affects spot market prices (G13) |
| Market behavior under different conditions of vertical integration and market power (L11) | Comparative analysis of market behavior (G40) |
| Reject hypothesis of perfect competition (D41) | Confirm assumption of joint profit maximization (L21) |