Does Strategic Ability Affect Efficiency? Evidence from Electricity Markets

Ali Hortacsu, Fernando Luco, Steven Puller () and Dongni Zhu

No 23526, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Oligopoly models of price competition predict that strategic firms exercise market power and generate inefficiencies. However, heterogeneity in firms’ strategic ability also generates inefficiencies. We study the Texas electricity market where firms exhibit significant heterogeneity in how they deviate from Nash equilibrium bidding. These deviations, in turn, increase the cost of production. To explain this heterogeneity, we embed a Cognitive Hierarchy model into a structural model of bidding and estimate firms’ strategic sophistication. We find that firm size and manager education affect sophistication. Using the model, we show that mergers that increase sophistication can increase efficiency despite increasing market concentration.

JEL-codes: D03 D22 L1 (search for similar items in EconPapers)
Date: 2017-06
New Economics Papers: this item is included in nep-com, nep-ene and nep-reg
Note: EEE IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published as Ali Hortaçsu & Fernando Luco & Steven L. Puller & Dongni Zhu, 2019. "Does Strategic Ability Affect Efficiency? Evidence from Electricity Markets," American Economic Review, vol 109(12), pages 4302-4342.

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