Strategic Reneging and Market Power in Sequential Markets

David Benatia () and Etienne Billette de Villemeur ()
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David Benatia: ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - GENES - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris, HEC Montréal - HEC Montréal
Etienne Billette de Villemeur: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique

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Abstract: This article investigates the incentives for firms with market power to manipulate markets by strategically reneging on forward commitments. We first study the behavior of a dominant firm in a two‐period model with demand uncertainty. We then use the model's predictions and a machine learning approach to investigate multiple occurrences of reneging on long‐term commitments in Alberta's electricity market in 2010–2011. We find that a supplier significantly increased its revenues by strategically reneging on its capacity availability obligations, causing Alberta's annual electricity procurement costs to increase by as much as $600 million (+17%).

Date: 2025-02-05
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Published in RAND Journal of Economics, 2025, 56 (1), pp.3-34. ⟨10.1111/1756-2171.12488⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05105587

DOI: 10.1111/1756-2171.12488

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