Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/86820 
Year of Publication: 
2011
Series/Report no.: 
Tinbergen Institute Discussion Paper No. 11-033/1
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
In the process of regulatory reform in the electric power industry, the mitigation of market power is one of the basic problems regulators have to deal with. We use experimental data to study the sources of market power with supply function competition, akin to the competition in wholesale electricity markets. An acute form of market power may arise if a supplier is pivotal; that is, if the supplier's capacity is required in order to meet demand. To be able to isolate the impact of demand and capacity conditions on market power, our treatments vary the distribution of demand levels as well as the amount and symmetry of the allocation of production capacity between different suppliers. We relate our results to a descriptive power index and to the predictions of two alternative models: a supply function equilibrium (SFE) model and a multi-unit auction (MUA) model. We find that pivotal suppliers do indeed exercise their market power in the experiments. We also find that observed behavior is consistent with the range of equilibria of the unrestricted SFE model and inconsistent with the unique equilibria of two refinements of the SFE model and of the MUA model.
Subjects: 
Market Power
Electric Power Markets
Pivotal Suppliers
Experiments
JEL: 
C92
D43
L11
L94
Document Type: 
Working Paper

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