Sequential Markets, Market Power and Arbitrage

Koichiro Ito and Mar Reguant

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

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 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 our setting, we show that full arbitrage is not necessarily welfare-enhancing in the presence of market power. It reduces consumer costs but decreases productive efficiency.

Pages: 55 pages
Date: 2015-02
New Economics Papers: this item is included in nep-com, nep-cta, nep-ene and nep-reg
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https://www.rieti.go.jp/jp/publications/dp/15e015.pdf (application/pdf)

Related works:
Journal Article: Sequential Markets, Market Power, and Arbitrage (2016)
Working Paper: Sequential Markets, Market Power and Arbitrage (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:15015

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