Working Paper: NBER ID: w13509
Authors: Erin T. Mansur
Abstract: Restructuring electricity markets has enabled wholesalers to exercise market power. Using a common method of measuring competitive behavior in these markets, several studies have found substantial inefficiencies. This method overstates actual welfare loss by ignoring production constraints that result in non-convex costs. I develop an alternative method that accounts for these constraints and apply it to the Pennsylvania, New Jersey, and Maryland market. For the summer following restructuring, the common method implies that market imperfections resulted in considerable welfare loss, with actual production costs exceeding the competitive model's estimates by 13 to 21 percent. In contrast, my method finds that actual costs were only between three and eight percent above the competitive levels. In particular, it is the fringe firms whose costs increase, while strategic firms reduce production and costs.
Keywords: No keywords provided
JEL Codes: L13; L94
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| common method of measuring welfare loss (D69) | overestimation of actual welfare loss (D69) |
| actual production costs (D24) | exceed competitive model estimates (C52) |
| alternative method (Q42) | finds costs only 3 to 8 percent above competitive levels (L11) |
| restructuring (L16) | welfare loss due to wholesalers exercising market power (D69) |
| static model's prediction (C52) | 13 to 21 percent welfare loss (D69) |
| fringe firms experiencing increased costs (D21) | cross-firm production inefficiencies (D21) |