Working Paper: NBER ID: w20782
Authors: Koichiro Ito; Mar Reguant
Abstract: We develop a theoretical framework to characterize strategic behavior in sequential markets under imperfect competition and limited arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using micro-data from the Iberian electricity market. We show that the observed price differences and firm behavior are consistent with the model. Finally, we quantify the welfare effects of arbitrage using a structural model. In our setting, we show that full arbitrage is not necessarily welfare-enhancing in the presence of market power, reducing consumer costs but decreasing productive efficiency.
Keywords: Market Power; Arbitrage; Sequential Markets; Electricity Markets
JEL Codes: D43; L13; L94; Q40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Power (L11) | Price Premiums (D49) |
| Price Premiums (D49) | Welfare Effects (D69) |
| Market Power (L11) | Strategic Withholding of Production (L11) |
| Arbitrage (D46) | Consumer Surplus (D11) |
| Market Power (L11) | Social Welfare (I38) |
| Dominant Firms (L10) | Price Arbitrage (D44) |
| Fringe Firms (G24) | Price Arbitrage (D44) |