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Title:Strategic capacity choice under uncertainty: the impact of market structure on investment and welfare PDF Logo
Authors:Grimm, Veronika
Zoettl, Gregor
Issue Date:2008
Series/Report no.:IWQW discussion paper series 01/2008
Abstract:We analyze a market game where firms choose capacities under uncertainty about future market conditions and make output choices after uncertainty has unraveled. We show existence and uniqueness of equilibrium under imperfect competition and establish that capacity choices by strategic firms are generally too low from a welfare point of view. We also demonstrate that strategic firms choose even lower capacities if they anticipate competitive spot market pricing (e.g. due to regulatory intervention). We finally illustrate how the model can be used to assess the impact of electricity market liberalization on total capacity and welfare by fitting it to the data of the German electricity market.
Subjects:Investment incentives
demand uncertainty
cost uncertainty
Cournot competition
First Best
Second Best
capacity obligations
spot market regulation
JEL:D43
L13
D41
D42
D81
Document Type:Working Paper
Appears in Collections:IWQW Discussion Paper Series, FAU Erlangen-Nürnberg

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