Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets
James B. Bushnell, Erin T. Mansur, Celeste Saravia
American Economic Review · 2008 · Volume 98 · Issue 1
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. (JEL L11, L13, L94)
Keywords
Production, Pricing, and Market Structure, Size Distribution of Firms, Oligopoly and Other Imperfect Markets, Electric Utilities
Enable JavaScript for citation tools and additional paper interactions.