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American Economic Review: Vol. 98 No. 1 (March 2008)

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Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets

Article Citation

Bushnell, James B., Erin T. Mansur, and Celeste Saravia. 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets." American Economic Review, 98(1): 237-66.

DOI: 10.1257/aer.98.1.237

Abstract

This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure. (JEL L11, L13, L94)

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Authors

Bushnell, James B. (U CA Energy Institute, U CA, Berkeley)
Mansur, Erin T. (Yale U)
Saravia, Celeste (U CA Energy Institute, U CA, Berkeley)

JEL Classifications

L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L13: Oligopoly and Other Imperfect Markets
L94: Electric Utilities


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