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Price coordination in vertically integrated electricity markets. Theory and empirical evidence

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We analyse vertical integration between generators and retailers in electricity markets and we discuss the implications for price decisions of the presence of asymmetric (cost) information in a simple P-A framework. We analyze a situation in which generators post supply bids taking into account the profit of the entire vertically integrated group they belong to. We then discuss the way in which the degree of vertical integration affects this bidding strategy. Using Italian electricity auction data we show how bid prices posted by a pivotal producer are significantly influenced by variables incorporating vertical integration into the econometric model.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Energy and the Environment – Policy and Regulation; Energy and the Economy; Energy and the Environment – Environmental Market Design; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Economy – Other; Electricity – Generation Technologies

JEL Codes: Q41: Energy: Demand and Supply; Prices, D44: Auctions, Q40: Energy: General, D21: Firm Behavior: Theory, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, D22: Firm Behavior: Empirical Analysis

Keywords: Regulation, vertical integration, electricity markets, strategic delegation

DOI: 10.5547/01956574.37.1.bbos

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Published in Volume 37, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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