The Extent of the Market and Integration Through Factor Markets: Evidence from Wholesale Electricity

R. Andrew Butters, Indiana University and Daniel F. Spulber, Northwestern University - Kellogg School of Management discuss The Extent of the Market and Integration Through Factor Markets: Evidence from Wholesale Electricity.

ABSTRACT: We document the influence of factor markets in determining the extent of the market, by appealing to the Mundell Hypothesis that trade in goods markets and factor markets are substitutes. We confirm this influence using the U.S. wholesale market for electric power. Although the Eastern, Western, and Texas regions are unable to trade electricity, inputs such as natural gas move freely across these regions. After finding co-movement amongst electricity and natural gas prices, we estimate a supply model for natural gas to show shocks propagate across regions. We conclude output markets institutionally in autarky are economically integrated through factor markets.