Vertical Arrangements, Market Structure, and Competition An Analysis of Restructured U.S. Electricity Markets
This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure.
We thank Soledad Arellano, Severin Borenstein, Joe Bowring, Judy Chevalier, Phil Haile, Stephen Holland, Jun Ishii, Wally Mullin, Steve Puller, Peter Schott, Fiona Scott Morton, Raphael Thomadsen, Larry White, Matt White, Frank Wolak, Catherine Wolfram, two anonymous referees, and seminar participants at Colby College,International Industrial Organization Conference, Massachusetts Institute of Technology, New York University, University of California Energy Institute, University of California at Irvine, University of Toulouse, Wesleyan University, and Yale University for helpful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, vol. 98(1), pages 237-66, March. citation courtesy of