Antitrust & Competition Policy Blog

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

Tuesday, April 21, 2015

Sequential Markets, Market Power and Arbitrage

Koichiro Ito and Mar Reguant have written on 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/2015/04/sequential-markets-market-power-and-arbitrage.html

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