Prices and Concentration: A U-shape? Theory and Evidence from Renewables

Michele Fioretti, Junnan He and Jorge Tamayo

Papers from arXiv.org

Abstract: We show that when firms compete via supply functions, transferring high-cost capacity to the largest, most efficient firm--thereby diversifying its production technologies while increasing concentration--can lower prices by prompting the leader to expand output and competitors to aggressively defend market shares. However, large transfers prove anticompetitive, as sizable capacity differences discourage price undercutting. Exploiting renewable intermittencies in Colombia's electricity market, where firms are technology-diversified, we consistently find a U-shape relationship between prices and concentration. Counterfactually reallocating 30% of competitors' high-cost capacities to the leader cuts prices 10%, while larger transfers raise them, revealing how capacity and efficiency influence market power.

Date: 2024-07, Revised 2025-04
New Economics Papers: this item is included in nep-bec, nep-com, nep-ene, nep-env, nep-ind and nep-reg
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Working Paper: Prices and Concentration: A U-Shape? Theory and Evidence from Renewables (2024)
Working Paper: Prices and Concentration: A U-Shape? Theory and Evidence from Renewables (2024)
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