How to Determine whether Regional Markets are Integrated? Theory and Evidence from European Electricity Markets

Georg Gebhardt and Felix Höffler

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: Prices may di er between regional markets if transport capacities are limited. We develop a new approach to determine to which extent such di erences stem from limited participation in cross-border trader rather than from bottlenecks. We derive a theoretical integration benchmark for the typical case where transportation markets clear before the product markets, using Grossman's (1976) notion of a rational expectations equilibrium. We compare the benchmark to data from European electricity markets. The data reject the integration hypothesis: Capacity prices contain too little information about spot price di erential; this indicates that well informed traders do not engage in cross-border trade.

Keywords: Market integration; electricity markets; interconnector; competition policy; rational expectations equilibrium (search for similar items in EconPapers)
JEL-codes: D84 G14 L94 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-eec, nep-ene, nep-mic and nep-ure
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