Structural versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns

Silvester Van Koten and Andreas Ortmann

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: We try to better understand the comparative advantages of structural and behavioral remedies of deregulation in electricity markets, an eminent policy issue for which the experimental evidence is scant and problematic. Specifically, we investigate theoretically and experimentally the effects on competition of introducing a forward market — considered a behavioral remedy by the European Commission. We compare this scenario with the best alternative, the structural remedy of reducing concentration by adding one more competitor by divestiture. Our study contributes to the literature by introducing more realistic cost configurations, by teasing apart competition effect and asset effect, and by investigating competitor numbers that reflect the market concentration in the European electricity industries. Our experimental data suggest that introducing a forward market has a positive effect on the aggregate supply in markets with two or three major competitors, configurations typical for the newly accessed and the old European Union member states, respectively. Introducing a forward market also increases efficiency. In contrast to previous findings, our data furthermore suggest that the effect of introducing a forward market is stronger than adding one more competitor both in markets with two, and particularly three, producers. Our data thus provides evidence that behavioral remedies may be more effective than structural remedies. Our data suggest that competition authorities are well advised, in line with EU law (European Commission, 2006a, p.11), to focus on introducing, and facilitating the proper functioning of, forward markets rather than on lowering market concentration by divestiture.

Keywords: economics experiments; market power; competition; forward markets; EU electricity market (search for similar items in EconPapers)
JEL-codes: C91 D61 L13 L43 L94 Q48 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-com, nep-ene, nep-eur, nep-exp and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns (2013)
Working Paper: Structural versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns (2012)
Working Paper: Structural versus Behavioral Measures in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns (2011)
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