Sequential Markets, Market Power, and Arbitrage
- (pp. 1921-57)
Abstract
We develop a framework to characterize strategic behavior in sequential markets under imperfect competition and restricted entry in arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using microdata from the Iberian electricity market. We show that the observed price differences and firm behavior are consistent with the model. Finally, we quantify the welfare effects of arbitrage using a structural model. In the presence of market power, we show that full arbitrage is not necessarily welfare-enhancing, reducing consumer costs but increasing deadweight loss.Citation
Ito, Koichiro, and Mar Reguant. 2016. "Sequential Markets, Market Power, and Arbitrage." American Economic Review, 106 (7): 1921-57. DOI: 10.1257/aer.20141529Additional Materials
JEL Classification
- D42 Market Structure, Pricing, and Design: Monopoly
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- L12 Monopoly; Monopolization Strategies
- L13 Oligopoly and Other Imperfect Markets
- L94 Electric Utilities
- Q41 Energy: Demand and Supply; Prices