American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets
American Economic Review
vol. 98,
no. 1, March 2008
(pp. 237–66)
Abstract
This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure. (JEL L11, L13, L94)Citation
Bushnell, James B., Erin T. Mansur, and Celeste Saravia. 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets." American Economic Review, 98 (1): 237–66. DOI: 10.1257/aer.98.1.237Additional Materials
JEL Classification
- L11 Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 Oligopoly and Other Imperfect Markets
- L94 Electric Utilities