Predicting market power in wholesale electricity markets

David M Newbery

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.

Keywords: Residual Supply Index; Cournot equilibrium; Lerner Index; electricity markets; market power (search for similar items in EconPapers)
JEL-codes: D43 K21 L94 (search for similar items in EconPapers)
Date: 2008-08
New Economics Papers: this item is included in nep-com, nep-ene, nep-ind, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Predicting Market Power in Wholesale Electricity Markets (2009)
Working Paper: Predicting Market Power in Wholesale Electricity Markets (2009)
Working Paper: Predicting market power in wholesale electricity markets (2008)
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