Private management and strategic bidding behavior in electricity markets: Evidence from Colombia

Abstract

This paper studies two key aspects of the introduction of private management in the Colombian electricity generation industry: (1) It quantifies the impact of changes to private management on bidding prices; (2) Verifies empirically the basic predictions from the theory of mixed oligopoly markets. Specifically, it investigates how the market concentration and the level of forward contracting affect the potential changes in the exercise of market power subsequent to the switch to private management. It applies a differences-in-differences model with staggered adoption on bidding daily data of the firms in the Colombian wholesale electricity market between 2002 and 2018. The results suggest that: (1) switches to private management provoke a non-permanent increase in bidding prices, consistent with an initial dominance of a market power effect which is gradually offset by cost improvements; (2) Higher levels of market concentration are associated with a greater increase in bidding prices resulting from the change to private management; (3) Lower levels of forward contracting are linked with higher bidding prices for both, public and private firms.