Collusive Long-Run Investments under Transmission Price-Caps

Christiaan Hogendorn ()

Journal of Regulatory Economics, 2003, vol. 24, issue 3, 91 pages

Abstract: In the short run, constraints in the electricity transmission system may give market power to generators. This paper examines whether the constraints themselves are a long-run equilibrium outcome in a competitive environment. We show that independent transmission companies and generators can tacitly collude to raise prices to consumers and divide the resulting profits. We also show that price cap regulation does not prevent this behavior and may in fact contribute to it. The mechanism for collusion is that generators locate their plants so that a capacity-constrained transmission line lies between them and their consumer market. We show that this constraint-based collusion can be sustained in a static game without any punishment strategies. Copyright 2003 by Kluwer Academic Publishers

Date: 2003
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