Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured U.S. Electricity Markets

Posted by D. Daniel Sokol

Let I forget that over half of the readers of this blog are from the United States, there is interesting new electric energy competition scholarship in the US market as well.  The team of James B. Bushnell (Berkeley Haas School of Business), Erin T. Mansur (Yale School of Management), Celeste Saravia (Berkeley Electrical Engineering) have just authored the study Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured U.S. Electricity Markets.

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.