Working Paper: CEPR ID: DP6756
Authors: Natalia Fabra; Maria Angeles De Frutos
Abstract: Several regulatory authorities worldwide have recently imposed forward contract obligations on electricity producers as a way to mitigate their market power. In this paper we investigate how such contractual obligations affect equilibrium bidding in electricity markets, or in any other auction-based market. For this purpose, we introduce forward contracts in a uniform-price multi-unit auction model with complete information. We find that forward contracts are pro-competitive when allocated to relatively large and efficient firms; however, they might be anti-competitive otherwise. We also show that an increase in contract volume need not always be welfare improving. From a methodological point of view, we aim at contributing to the literature on multi-unit auctions with discrete bids.
Keywords: Antitrust remedies; Discrete bids; Electricity; Forward contracts; Market power; Multiunit auctions; Simulations
JEL Codes: G13; L13; L94
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| forward contracts (G13) | equilibrium outcomes (D51) |
| allocation of forward contracts (G13) | firms' incentives to bid strategically (L21) |
| firms' incentives to bid strategically (L21) | equilibrium price and quantity outcomes (D41) |
| allocation of forward contracts to large and efficient firms (G18) | procompetitive outcomes (L13) |
| allocation of forward contracts to smaller or less efficient firms (G19) | anticompetitive effects (L41) |
| increases in contract volume (D86) | welfare improvements (I38) |
| contract allocation (M55) | market dynamics (D49) |