Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Friday, February 27, 2015

Sequential Markets, Market Power and Arbitrage

Koichiro Ito, Stanford University and Mar Reguant, Stanford University - Knight Management Center theorize about Sequential Markets, Market Power and Arbitrage.

ABSTRACT: We develop a theoretical framework to characterize strategic behavior in sequential markets under imperfect competition and limited arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using micro-data 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 our setting, we show that full arbitrage is not necessarily welfare-enhancing in the presence of market power, reducing consumer costs but decreasing productive efficiency.

https://lawprofessors.typepad.com/antitrustprof_blog/2015/02/sequential-markets-market-power-and-arbitrage.html

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