American Economic Review Vol. 98 No. 1 2008

Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets

James Bushnell¹; Erin T. Mansur²; Celeste Saravia¹

¹ University of California Energy Institute, 2547 Channing Way, Berkeley, CA 94720-5180. · ² Yale School of Management, 135 Prospect Street, P.O. Box 208200, New Haven, CT 06520–8200, and National Bureau of Economic Research.

Abstract

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.

DOI

10.1257/aer.98.1.237

Volume

98

Issue

1

Pages

237-266

Language

en

Sources

openalex bibtex:phds-export.bib 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 ✓