Restructuring the Electricity Industry: Vertical Structure and the Risk of Rent Extraction

We study the role of vertical structure in determining generating capacities and retail prices in the electricity industry. Allowing for uncertain demand, we compare three market configurations: (i) integrated monopoly, (ii) integrated duopoly with wholesale trade, and (iii) separated duopoly with wholesale trade. We find that equilibrium capacities and retail prices are such that welfare is highest (lowest) under separated (integrated) duopoly. The driving force behind this result is the risk of rent extraction faced by competing integrated generators on the wholesale market. Our analysis suggests that vertical structure plays an important role in determining generating capacities and retail prices.

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Year of publication:	2014
Authors:	Boom, Anette ; Buehler, Stefan
Publisher:	Frederiksberg : Copenhagen Business School (CBS), Department of Economics
Subject:	Electricity \| Investments \| Generating Capacities \| Vertical Integration \| Monopoly and Competition

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Series:	Working paper ; 2-2014
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Working Paper
Language:	English
Other identifiers:	810894556 [GVK] hdl:10419/208576 [Handle] hdl:10398/9031 [Handle] RePEc:hhs:cbsnow:2014_002 [RePEc]
Classification:	D42 - Monopoly ; D43 - Oligopoly and Other Forms of Market Imperfection ; D44 - Auctions ; L11 - Production, Pricing, and Market Structure Size; Size Distribution of Firms ; L12 - Monopoly; Monopolization Strategies ; L13 - Oligopoly and Other Imperfect Markets
Source:	EconStor

Persistent link: https://www.econbiz.de/10012142377