Sequential Markets, Market Power, and Arbitrage
American Economic Review · 2016 · Volume 106 · Issue 7
Abstract
We develop a framework to characterize strategic behavior in sequential markets under imperfect competition and restricted entry in arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using microdata 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 the presence of market power, we show that full arbitrage is not necessarily welfare-enhancing, reducing consumer costs but increasing deadweight loss.
Keywords
Market Structure, Pricing, and Design: Monopoly, and Design: Oligopoly and Other Forms of Market Imperfection, Monopoly, Monopolization Strategies, Oligopoly and Other Imperfect Markets, Electric Utilities, Energy: Demand and Supply, Prices
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