Vertical Structure and the Risk of Rent Extraction in the Electricity Industry

Anette Boom and Stefan Buehler

No 8-2018, Working Papers from Copenhagen Business School, Department of Economics

Abstract: This paper studies how competition and vertical structure jointly determine generating capacities, retail prices, and welfare in the electricity industry. Analyzing a model in which demand is uncertain and retailers must commit to retail prices before they buy electricity in the wholesale market, we show that welfare is highest if competition in generation and retailing is combined with vertical separation. Vertically integrated generators choose excessively high retail prices and capacities to avoid rent extraction in the wholesale market when their retail demand exceeds their capacity. Vertical separation eliminates the risk of rent extraction and yields lower retail prices.

Keywords: Electricity; Generating Capacities; Vertical Integration; Monopoly; Competition (search for similar items in EconPapers)
JEL-codes: D42 D43 D44 L11 L12 L13 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2018-08-23
New Economics Papers: this item is included in nep-com, nep-ene and nep-reg
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Journal Article: Vertical structure and the risk of rent extraction in the electricity industry (2020)
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