Strategic capacity choice under uncertainty: the impact of market structure on investment and welfare

Veronika Grimm () and Gregor Zoettl

No 01/2008, IWQW Discussion Paper Series from Friedrich-Alexander-Universität Erlangen-Nürnberg, Institut für Wirtschaftspolitik und Quantitative Wirtschaftsforschung (IWQW)

Abstract: We analyze a market game where firms choose capacities under uncertainty about future market conditions and make output choices after uncertainty has unraveled. We show existence and uniqueness of equilibrium under imperfect competition and establish that capacity choices by strategic firms are generally too low from a welfare point of view. We also demonstrate that strategic firms choose even lower capacities if they anticipate competitive spot market pricing (e.g. due to regulatory intervention). We finally illustrate how the model can be used to assess the impact of electricity market liberalization on total capacity and welfare by fitting it to the data of the German electricity market. --

Keywords: Investment incentives; demand uncertainty; cost uncertainty; Cournot competition; First Best; Second Best; capacity obligations; spot market regulation (search for similar items in EconPapers)
JEL-codes: D43 L13 D41 D42 D81 (search for similar items in EconPapers)
Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:zbw:iwqwdp:012008

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