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Energy and IO

Paper Session

Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PST)

Manchester Grand Hyatt, America's Cup AB
Hosted By: Industrial Organization Society
  • Chair: Mar Reguant, Northwestern University

Who Pays at the Pump? Consumer Search in the Gasoline Market

Jackson Dorsey
,
Indiana University
Ashley Langer
,
University of Arizona
Shaun McRae
,
ITAM

Abstract

This paper uses extremely detailed driving data to understand the demand-side of the retail gasoline market. Our data allows us to observe a set of drivers' second-by-second driving behavior including location, tank level, and gasoline stops. We begin with descriptions of the gasoline purchases drivers make, conditional on their tank levels, routes, recently passed stations, and station prices. We find considerable heterogeneity across drivers and trips in whether drivers purchase from stations with comparatively low prices. We then attempt to understand what affects the relative price drivers pay in order to understand the determinants of gasoline search behavior. We use both traditional logit models of station choice as well as more complex models of consideration set formation. We find that consumers consider only a subset of stations near their route and that their consideration set is influenced by where they've recently traveled, where they've purchased from in the past, station average prices, and the wholesale gasoline price level. We use these results to gain a better understanding of the role of information in gasoline markets, and to understand what types of information might aid consumer decision-making.

Innovation in the Wind Power Industry

Thomas R. Covert
,
University of Chicago
Richard L. Sweeney
,
Boston College

Abstract

We study the impact of demand-side policy and imperfect competition on the path of technical progress in the market for wind turbines. A nice feature of this technology is that the underlying engineering challenge manufacturers face reduces to a simple physical relationship pertaining to the size of the device, which is low dimensional and readily observable. We relate changes in the realized engineering frontier to policy changes which spur demand, and recover innovation cost functions from a structural model of developer adoption and manufacturer innovation.

Market Size and Market Power: Evidence from the Texas Electricity Market

Matt Woerman
,
University of Massachusetts-Amherst

Abstract

Economic theory tells us that market structure is the primary determinant of a firm's ability to exercise market power. However, it is challenging to empirically estimate the causal effect of market structure on market power because a firm rarely experiences exogenous variation in its market's structure. In this paper, I exploit a novel source of exogenous variation in market size within the Texas electricity market---congestion of electricity transmission lines due to ambient temperature shocks---to estimate the causal effect of market size on the exercise of market power. When transmission lines congest, this statewide market splits into smaller localized markets. I find that a 10% reduction in market size causes firms to more than double markups. The direction of this effect is consistent with a model of oligopoly competition in which firms set markups in response to residual demand, which is less elastic in a smaller market. My results imply that the markups induced by transmission congestion at high temperatures generate $7.1--21.5 million of deadweight loss annually. These markups also create large transfers---$2.1 billion per year---from consumers to producers, which raise important equity concerns.

Wire, Wire, Plants For Hire? Transmission Constraints and Electricity Trade in India

Fiona Burlig
,
University of Chicago
Akshaya Jha
,
Carnegie Mellon University
Louis Preonas
,
University of Chicago

Abstract

This paper studies the influence of transmission infrastructure on electricity market outcomes in a developing country context. Both economic theory and evidence based on ex ante structural simulations (Ryan (2017)) suggest that increasing electricity transmis- sion capacity should (i) decrease price dispersion between previously separated regions and (ii) reduce the overall cost of generation, by shifting production to lower-cost plants. We assemble a novel dataset on daily transmission capacities between regions of India’s power grid, in order to generate ex post empirical tests of these hypotheses. For the 5 percent of Indian electricity sold on a wholesale power market, we find that a 300 MW increase in transmission capacity leads to a 15 percent reduction in interregional prices wedges. However, for the remaining 95 percent of Indian electricity sold on bilateral contracts, we find that changes in transmission capacity have no detectable effect on either the quantity or the average variable cost of generation. These results suggest that given India’s current institutions and generating resources, the short-run economic benefits of incremental investments in transmission infrastructure are likely to be small.
Discussant(s)
Jean-Francois Houde
,
University of Wisconsin-Madison
Jing Li
,
Massachusetts Institute of Technology
Mar Reguant
,
Northwestern University
Steve Cicala
,
University of Chicago
JEL Classifications
  • L9 - Industry Studies: Transportation and Utilities