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Horizontal subcontracting and investment in idle dispatchable power plants

Jan Bouckaert and Geert Van Moer

International Journal of Industrial Organization, 2017, vol. 52, issue C, 307-332

Abstract: We analyze horizontal subcontracting and show how idle production facilities can reduce contracting costs by credibly protecting against hold-up. Our analysis contributes to understanding competition between power firms that increasingly use intermittent generation sources. Their unilateral incentives to invest in maintaining underused units, such as dispatchable gas-fired plants, are underrated by plant profitability indicators. From a policy perspective, decentralized strategic investment incentives reduce the possible need for centralized security of supply measures. Our welfare analysis indicates that quantity competition can lead to a lower market-clearing price than price competition.

Keywords: Horizontal subcontracting; Security of supply; Strategic investment; Intermittent energy sources (search for similar items in EconPapers)
JEL-codes: D43 L13 L14 L94 (search for similar items in EconPapers)
Date: 2017
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