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Market Structure and the Price of Electricity: An Ex Ante Analysis of the Deregulated Swedish Electricity Market

Abstract:
Following new legislation the Swedish electricity market is about to be deregulated. The new system is designed to ensure competition introduction and supply. The main motive for deregulation is to increase competition and thus achieve lower market prices. A possible threat to this outcome is the high degree of concentration on the seller side that characterizes the Swedish electricity market. In this paper we show that given the current structure of firms on the supply side, deregulation is not a sufficient condition for lower equilibrium prices in the electricity market. We use a numerical model to explore the quantitative relation between the Cournot-equilibrium price, the number of firms, and the size distribution of firms in the Swedish electricity market. We compute equilibrium electricity prices and a welfare measure in order to quantify the effect of asymmetric market concentration on competition.

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Energy Specializations: Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes: Q48: Energy: Government Policy, Q41: Energy: Demand and Supply; Prices, D21: Firm Behavior: Theory, D22: Firm Behavior: Empirical Analysis, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, L13: Oligopoly and Other Imperfect Markets, D47: Market Design

Keywords: Electricity prices, deregulation, Sweden, Cournot, competition, electricity market

DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No2-5


Published in Volume16, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.