Structural versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns.

We try to better understand the comparative advantages of structural and behavioral remedies of deregulation in electricity markets, an eminent policy issue for which the experimental evidence is scant and problematic. Specifically, we investigate theoretically and experimentally the effects on competition of introducing a forward market which the European Commission classifies as a behavioral remedy. We compare this scenario with its best alternative, the structural remedy of adding one more competitor by divestiture. Our study contributes to the literature by introducing more realistic cost configurations, by teasing apart competition effect and asset effect, and by investigating competitor numbers that reflect the market concentration in the European electricity industries. Our experimental data suggest that introducing a forward market has a positive effect on the aggregate supply in markets with two or three major competitors, configurations typical for the newly accessed and the old European Union member states, respectively. Introducing a forward market also increases efficiency.