American Economic Review Vol. 106 No. 7 2016

Sequential Markets, Market Power, and Arbitrage

Koichiro Ito¹; Mar Reguant²

¹ Harris School of Public Policy, University of Chicago, 1155 East 60th Street, Chicago, IL 60637 (e-mail: ) · ² Department of Economics, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208 (e-mail: )

Abstract

We develop a framework to characterize strategic behavior in sequential markets under imperfect competition and restricted entry in arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using microdata 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 the presence of market power, we show that full arbitrage is not necessarily welfare-enhancing, reducing consumer costs but increasing deadweight loss.

DOI

10.1257/aer.20141529

Volume

106

Issue

7

Pages

1921-1957

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓