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Sequential Markets, Market Power and Arbitrage

Koichiro Ito () and Mar Reguant ()

No 20782, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a theoretical framework to characterize strategic behavior in sequential markets under imperfect competition and limited arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using micro-data from the Iberian electricity market. We show that the observed price differences and firm behavior are consistent with the model. Finally, we quantify the welfare effects of arbitrage using a structural model. In our setting, we show that full arbitrage is not necessarily welfare-enhancing in the presence of market power, reducing consumer costs but decreasing productive efficiency.

JEL-codes: D43 L13 L94 Q40 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-com, nep-cta and nep-ene
Note: EEE IO
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Published as Koichiro Ito & Mar Reguant, 2016. "Sequential Markets, Market Power, and Arbitrage," American Economic Review, American Economic Association, vol. 106(7), pages 1921-57, July.
Published as Koichiro Ito & Mar Reguant, 2016. "Sequential Markets, Market Power, and Arbitrage," American Economic Review, vol 106(7), pages 1921-1957.

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Journal Article: Sequential Markets, Market Power, and Arbitrage (2016) Downloads
Working Paper: Sequential Markets, Market Power and Arbitrage (2015) Downloads
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