Preventing Monopoly or Discouraging Competition? The Perils of Price-Cost Tests for Market Power in Electricity

Timothy Brennan

RFF Working Paper Series from Resources for the Future

Abstract: Allegations of market power in wholesale electricity sales are typically tested using price-cost margins. Such tests are inherently suspect in markets - such as electricity - that are subject to capacity constraints. In such markets, prices can vary with demand while quantity, and thus cost measure, remain fixed. Erroneous conclusions are more likely when the proxy for marginal cost is the average operating cost of the marginal plant. Measured this way, Lerner indexes are consistent with competitive behavior. Using this proxy to cap wholesale prices, as the U.S. Federal Energy Regulatory Commission has proposed, would discourage entry by making it impossible for peak power suppliers to recover capital costs. The wholesale electricity sector may be susceptible to market power. But a preferable (if not unproblematic) test for market power would look not at prices but output, i.e., whether individual generators withheld energy that would have been profitable to supply at prevailing prices.

Keywords: market power; electricity; peak load pricing (search for similar items in EconPapers)
JEL-codes: D42 L11 L51 L94 (search for similar items in EconPapers)
Date: 2002-10-01
New Economics Papers: this item is included in nep-com, nep-ene, nep-ind and nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.rff.org/RFF/documents/RFF-DP-02-50.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.rff.org/RFF/documents/RFF-DP-02-50.pdf [301 Moved Permanently]--> https://www.rff.org/RFF/documents/RFF-DP-02-50.pdf)

Related works:
Working Paper: Preventing Monopoly or Discouraging Competition? The Perils of Price-Cost Tests for Market Power in Electricity (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rff:dpaper:dp-02-50

Access Statistics for this paper

More papers in RFF Working Paper Series from Resources for the Future Contact information at EDIRC.
Bibliographic data for series maintained by Resources for the Future ().