Electricity Market Mergers with Endogenous Forward Contracting

David Brown and Andrew Eckert

No 2016-6, Working Papers from University of Alberta, Department of Economics

Abstract: We analyze the effects of electricity market mergers in an environment where firms endogenously choose their level of forward contracts prior to competing in the wholesale market. We apply our model to Alberta's wholesale electricity market. Firms have an incentive to reduce their forward contract coverage in the more concentrated post-merger equilibrium. We demonstrate that endogenous forward contracting magnifies the price increasing impacts of mergers, resulting in larger reductions in consumer surplus. Current market screening procedures used to analyze electricity mergers consider firms' pre-existing forward commitments. We illustrate that ignoring the endogenous nature of firms' forward commitments can yield biased conclusions regarding the impacts of market structure changes such as mergers. In particular, we show that the price effects of mergers can be largely underestimated when forward contract quantities are held at pre-merger levels. Whether the profits of the merged firm are greater with fixed or endogenous forward quantities is ambiguous.

Keywords: Electricity; Mergers; Forward Contracts; Market Power; Regulation (search for similar items in EconPapers)
JEL-codes: D43 L40 L51 L94 Q40 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2016-06-07
New Economics Papers: this item is included in nep-com, nep-cta, nep-ene and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Electricity market mergers with endogenous forward contracting (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2016_006

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