Vertical Arrangements, Market Structure and Competition: An Analysis of Restructured U.S. Electricity Markets

James Bushnell, Erin Mansur and Celeste Saravia

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure.

Date: 2008-03-01
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Published in American Economic Review, March 2008, vol. 98 no. 1, pp. 237-266

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Related works:
Journal Article: Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets (2008)
Working Paper: Vertical Arrangements, Market Structure, and Competition An Analysis of Restructured U.S. Electricity Markets (2007)
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