Working Paper: NBER ID: w13507
Authors: James B. Bushnell; Erin T. Mansur; Celeste Saravia
Abstract: This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure.
Keywords: electricity markets; vertical arrangements; market structure; competition
JEL Codes: L11; L13; L94
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Vertical arrangements (L22) | Lower wholesale prices (L42) |
| Vertical arrangements (L22) | Production efficiency (D24) |
| Vertical arrangements (L22) | Stabilizing force in pricing (D49) |
| Horizontal market structure alone (L19) | Incomplete explanation of market performance (G19) |
| Vertical structures (L22) | Market performance understanding (G14) |
| Vertical commitments (L14) | Actual prices align with Cournot equilibrium prices (D43) |