NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Sequential Markets, Market Power and Arbitrage

Koichiro Ito, Mar Reguant

NBER Working Paper No. 20782
Issued in December 2014
NBER Program(s):Environment and Energy Economics, Industrial Organization

We develop a theoretical framework to characterize strategic behavior in sequential markets under imperfect competition and limited arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using micro-data from the Iberian electricity market. We show that the observed price differences and firm behavior are consistent with the model. Finally, we quantify the welfare effects of arbitrage using a structural model. In our setting, we show that full arbitrage is not necessarily welfare-enhancing in the presence of market power, reducing consumer costs but decreasing productive efficiency.

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Document Object Identifier (DOI): 10.3386/w20782

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