Collusion with Capacity Constraints over the Business Cycle

This paper investigates the effect of capacity constraints on the sustainability of collusion in markets subject to cyclical demand fluctuations. In the absence of capacity constraints (i.e. a limiting case of our model), Haltiwanger and Harrington (1991) show that firms find it more difficult to collude during periods of decreasing demand. We find that this prediction can be overturned if firms' capacities are sufficiently small. Capacity constraints imply that punishment profits move procyclically, so that periods of increasing demand may lead to lower losses from cheating even if collusive profits are rising. Haltiwanger and Harrington's main prediction remains valid for su±ciently large capacities.Collusion, Capacity Constraints, Business Cycles

Price Wars and Collusion in the Spanish Electricity Market

We analyze the time-series of prices in the Spanish electricity market by means of a time varying-transition-probability Markov switching model. Accounting for changes in demand and cost conditions (which re°ect changes in input costs, capacity avail- ability and hydro power), we show that the time-series of prices is characterized by two signi¯cantly di®erent price levels. Based on a Green and Porter (1984)'s type of model that introduces several institutional details, we construct trigger variables that a®ect the likelihood of starting a price war. By interpreting the signs of the triggers, we are able to infer some of the properties of the collusive strategy that ¯rms might have followed. We obtain more empirical support to Green and Porter's model than previous studies

The Spanish Electricity Industry: Plus ca Change

Working paper públicado por el Instituto de Economía Industrial. serie nº 317,IDEI Working papersIn this paper we describe the Spanish electricity industry and its current regulatory regime. Special emphasis is given to the description and discussion of market design issues (including stranded cost recovery), the evolution of market structure, investment in generation capacity and network activities. We also provide a critical assessment of the 1997 regulatory reform, which did not succeed in introducing effective competition, but retained an opaque regulation which has been subject to continuous governmental interventionism. Furthermore, the implementation of the Kyoto agreement could show the lack of robustness of the regulatory regime

Capacity Markets for Electricity

The creation of electricity markets has raised the fundamental question as to whether markets provide the right incentives for the provision of the reserves needed to maintain system reliability, or whether some form of regulation is needed. In some states in the US, electricity retailers have been made responsible for providing such reserves by contracting capacity in excess of their forecasted peak demand. The so-called Installed Capacity Markets (ICAP) provide one means for contracting reserves, and are the subject of this paper. In particular, for given productive and transmission capacities, we identify firms' opportunity costs of committing resources in the capacity market, and hence, the costs of inducing full capacity commitment. Regulatory issues such as the optimal choice of the reserve margin and the capacity deficiency rate (which serves as a price-cap) are analyzed. From a welfare view- point, we also compare the desirability of providing reserves either through capacity markets or through the demand side (i.e. power curtailments).Electricity markets, capacity markets, regulation

Price Wars and Collusion in the Spanish Electricity Market

We analyze the pattern of pool prices in the Spanish electricity market during 1998 by means of a Time Varying Transition Probabilities Markov switching model. Our purpose is two­fold: firstly, to identify and date the drops in prices that cannot be accounted for by supply nor demand conditions; and secondly, under the assumption that these correspond with reversions to non­cooperative behaviour, to identify the trigger variables upon which a collusive equilibrium could be based upon. Our results confirm the hypothesis that two distinct price levels characterize the time series of pool prices, and point to the conclusion that price wars are induced by changes in the major generators' market shares. In turn, this shows that firms' pricing behaviour is highly influenced by the way in which the so­called Competition Transition Charges (CTCs) are computed.Electricity Markets, Tacit Collusion, Markov Switching

The Fall in British Electricity Prices: Market Rules, Market Structure, or Both?

In this paper we investigate the factors contributing to the fall in the Lerner Index (price-cost margin) in the British electricity market during the 90s. A first stage of our analysis models the number of breaks in the Lerner Index and their dating as unknowns. Our results suggest the existence of one structural break in the time series of the Lerner Index. The break point interval includes the go-live of the New Electricity Trading Arrangements (NETA), but also several other (but not all) regulatory interventions. In a second stage, we construct a general regression model for the Lerner index as a function of the regulatory interventions within the estimated break point interval, the Herfindahl- Hirschman Index (HHI), and the demand-capacity ratio. The results show that both the HHI and the demand-capacity ratio are strongly significant for explaining the fall in the Lerner Index. NETA is also significant, even when the Lerner Index is corrected for the influence of the HHI and the demand-capacity ratio.Electricity Markets, Regulatory Reform, Structural Breaks

Price Wars and Collusion in the Spanish Electricity Market

\We analyze the time-series of prices in the Spanish electricity market by means of a time varying-transition-probability Markov switching model. Accounting for changes in demand and cost conditions (which reflect changes in input costs, capacity availability and hydro power), we show that the time-series of prices is characterized by two significantly different price levels. Based on a Green and Porter (1984)'s type of model that introduces several institutional details, we construct trigger variables that affect the likelihood of starting a price war. By interpreting the signs of the triggers, we are able to infer some of the properties of the collusive strategy that firms might have followed. We obtain more empirical support to Green and Porter's model than previous studies. REVISED: January 2004Electricity Markets, Collusion, Markov Switching

Collusion with Capacity Constraints over the Business Cycle

This paper investigates the effect of capacity constraints on the sustainability of collusion in markets subject to cyclical demand fluctuations. In the absence of capacity constraints, Haltiwanger and Harrington (1991) [Haltiwanger, J., Harrington, J., 1991. The impact of cyclical demand movements on collusive behavior. Rand Journal of Economics. 22, 89–106.] show that firms find it more difficult to collude during periods of decreasing demand. We find that this prediction can be overturned if firms' capacities are sufficiently small. Capacity constraints imply that punishment profits move procyclically, so that periods of increasing demand may lead to lower losses from cheating even if collusive profits are rising. Haltiwanger and Harrington's main prediction remains valid for sufficiently large capacities.Publicad

La Electricidad: Mercados, Inversiones, y Garantía de Suministro

Publicad