Monday, April 4, 2011

Market Power in Water Markets

Posted by D. Daniel Sokol

Erik Ansink (IVM, VU University Amsterdam, and Wageningen University) and Harold Houba (VU University Amsterdam) explore Market Power in Water Markets.

ABSTRACT: Water markets with market power are analysed as multi-market Cournot competition in which the river structure constrains access to local markets and limited resources impose capacity constraints. Conditions for uniqueness are identified. Lerner indices are larger under binding resource constraints. The number of cases explodes in the number of local markets. Under quadratic benefit functions and symmetric constant marginal extraction costs, closed-form solutions for selected cases are derived, and numerical implementation through a single optimization program is available. Upstream locations face less competition than downstream. Observed price patterns in the Goulburn-Murray Irrigation District are consistent with the theoretical results.

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