NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Dongni Zhu

School of Finance
Shanghai Lixin University of Accounting
and Finance
995 Shangchuan Road
Shanghai, China, 201209

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: Texas A&M University

NBER Working Papers and Publications

June 2017Does Strategic Ability Affect Efficiency? Evidence from Electricity Markets
with Ali Hortaçsu, Fernando Luco, Steven L. Puller: w23526
Oligopoly models of price competition predict that strategic firms exercise market power and generate inefficiencies. However, heterogeneity in firms’ strategic ability also generates inefficiencies. We study the Texas electricity market where firms exhibit significant heterogeneity in how they deviate from Nash equilibrium bidding. These deviations, in turn, increase the cost of production. To explain this heterogeneity, we embed a Cognitive Hierarchy model into a structural model of bidding and estimate firms’ strategic sophistication. We find that firm size and manager education affect sophistication. Using the model, we show that mergers that increase sophistication can increase efficiency despite increasing market concentration.
 
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