Essays in Applied Microeconomics With Application to Electricity Markets

Abstract

The thesis consists of three parts dealing with both game theoretic and general equilibrium models, which were originally motivated by research questions regarding liberalized electricity markets. However, the model frameworks developed can more or less be applied to other industries as well. In Chapter 2, I study two electricity markets connected by a fixed amount of crossborder capacity. The total amount of capacity is known to all electricity traders and allocated via an auction. The capacity allocated to each bidder in the auction remains private information. We assume that traders are faced with a demand function reflecting the relationship between electricity transmitted between the markets and the spot price difference. Therefore, traders act like Bayesian-Cournot oligopolists in exercising their transmission rights when presented with incomplete information about the competitors’ capacities. Our analysis breaks down the welfare effect into three different components: Cournot behavior, capacity constraints, and incomplete information. We find that social welfare increases with the level of information with which traders are endowed. In Chapter 3, I study a Cournot oligopoly in which firms face incomplete information with respect to production capacities. For the case where the firms’ capacities are stochastically independent, the functional form of equilibrium strategies is derived. If inverse demand is concave, a unique symmetric equilibrium exists, and if demand is linear, then every equilibrium is symmetric. In the case of duopoly, I analyze the impact on social welfare when firms commit ex-ante on exchanging information. Sharing information increases expected output and social welfare in a large class of models. If the demand intercept is sufficiently large, sharing information increases producer surplus and decreases consumer surplus (and vice versa). In Chapter 4, I study the interdependency between two markets. In the first market, production capacity is offered; in the second, the produced commodity itself is sold. Selling capacity initially leads to foregone product market profits due to a lower output. These opportunity costs decrease with a firm’s marginal costs. The key issue of the model is that there arises an additional cost component of selling capacity: Keeping capacity ready for delivery on demand induces ready-to-operate costs that increase with a firm’s marginal costs. It is shown that a competitive equilibrium not only exists, but is unique and efficient. In this equilibrium, the cumulative supply function of the capacity market is u-shaped, meaning that it is convex with respect to marginal costs. The leading example is the electricity industry, in which there is a capacity market that clears before the spot market is able to follow