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Market Power in Electricity Markets: Beyond Concentration Measures

Abstract:
The wave of electricity market restructuring both within the United States and abroad has brought the issue of horizontal market power to the forefront of energy policy. Traditionally, estimation and prediction of market power has relied heavily on concentration measures. In this paper, we discuss the weaknesses of concentration measures as a viable measure of market power in the electricity industry, and we propose an alternative method based oil market simulations that take advantage of existing plant level data. We discuss results from previous studies the authors have performed, and present new results that allow for the detection of threshold demand levels where market power is likely to be a problem. In addition, we analyze the impact of that recent divestitures in the California electricity market will have on estimated market power. We close with a discussion of the policy implications of the results.

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

JEL Codes: L11: Production, Pricing, and Market Structure; Size Distribution of Firms, L13: Oligopoly and Other Imperfect Markets, D43: Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, D42: Market Structure, Pricing, and Design: Monopoly, D21: Firm Behavior: Theory, D22: Firm Behavior: Empirical Analysis, Q48: Energy: Government Policy, Q41: Energy: Demand and Supply; Prices

Keywords: Electricity markets, restructuring, liberalization, market power, regulation, electricity policy

DOI: 10.5547/ISSN0195-6574-EJ-Vol20-No4-3


Published in Volume20, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.