Long-term contract auctions and market power in regulated power industries |
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Authors: | M. Soledad Arellano Pablo Serra |
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Affiliation: | 1. School of Government, Universidad Adolfo Ibáñez, Diagonal Las Torres 2640, Peñalolén, Santiago, Chile;2. Department of Economics, Universidad de Chile, Diagonal Paraguay 257, Santiago, Chile |
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Abstract: | A number of countries with oligopolistic power industries have used marginal cost pricing to set the price of energy for small customers. This course of action, however, does not necessarily ensure an efficient outcome when competition is imperfect. The purpose of this paper is to study how the auction of long-term contracts could reduce market power. We do so in a two-firm, two-technology, linear-cost, static model where demand is summarized by a price inelastic load curve. In this context we show that the larger the proportion of total demand auctioned in advance, the lower are both the contract and the average spot price of energy. |
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Keywords: | L94 L51 |
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