Exercise Of Market Power Research Articles

A joint Cournot equilibrium model for the hydrogen and electricity markets

Hydrogen production through renewable energy-powered electrolysis is pivotal for fostering a sustainable future hydrogen market. In the electricity sector, hydrogen production bears an additional demand that affects electricity price, and mathematical models are needed for the joint simulation, analysis, and planning of electricity and hydrogen sectors. This study develops a Cournot and a perfect competition model to analyze the links of the electricity and hydrogen sectors. In contrast to other solving methods approaches, the Cournot model is solved by convex reformulation techniques, substantially easing the resolution. The case studies, focusing on the Iberian Peninsula, demonstrate the region's potential for competitive hydrogen production, and the advantages of perfect competition to maximize the use of renewable energies, in contrast to Cournot's oligopoly, where the exercise of market power raises electricity prices. Sensitivity analyses highlight the importance of strategic decision-making in mitigating market inefficiencies, with valuable insights for stakeholders and policymakers.

Competitive effects of implicit auction on interconnectors: evidence from Japan

Interconnectors play a crucial role in electric power systems. They contribute to balancing demand and supply in real-time, guaranteeing efficient dispatch in wide geographic regions, and increasing competition by creating large markets. However, interconnector capacity is a scarce resource because vertically integrated utilities were required to have generating capacity enough to supply most customers within their operating region under a regulated monopoly. Hence, identifying the efficient allocation method is essential, particularly after recent electricity market restructuring. This study evaluates the competitive effect of the implicit auction on the interconnector transmission capacity. The implicit auction allocates all the interconnector capacity simultaneously with electric energy in the day-ahead market. This method prevents market participants from strategically withholding the physical interconnector capacity ex ante to exercise market power, as allowed under the first come, first served rule. This study empirically shows how the capacity was withheld from the day-ahead market under the first come, first served rule using detailed reservation data. Next, I show that the implicit auction increases interconnector capacity available at the day-ahead market and trade volume. I use machine-learning methods, such as random forest and deep neural networks, to predict the counterfactual market outcomes without implicit auction. I find that the gain from trade under the implicit auction is more than US$55 million per year in Japan, which is more than 100 times the implementation cost of the implicit auction.

Regulating Transgenic Soybean Production in Argentina: The Role of Agro-Associations

Argentina's economy is organized mainly around the export of transgenic soybeans. This production is associated with several environmental and social costs. This article investigates transgenic soybean production regulation possibilities, which fulfills efficiency, acceptability, and feasibility by directly controlling production levels. Production quota markets are promising because they make it possible to implement cost-effective production. However, Argentina's agricultural sector is organized into large agro-associations with significant political power. The exercise of market power could challenge the attractive properties of production quota markets. This article considers the possibility of these organizations manipulating the quota market to capture a larger share of production. The production quota market could give rise to "raising rivals' costs" behavior. Contrary to the existing literature, this article shows that this strategy is profitable, even though the price of transgenic soybeans is fixed on international markets. To restore efficiency in production levels while preserving policy acceptability, we propose to auction production quotas with an adequate rebate revenue. Alternatively, initial quota allocation can be hybrid. The initial allocation chosen will depend on the trade-off between efficiency and acceptability of the environmental policy. Thus, while proposing a specific and adapted regulation for transgenic soybeans in Argentina, this article contributes to the knowledge of tradeable production quotas, which are almost less analyzed in the economic literature.

Exercising Market Power Without Using Prices: Service Time in Online Grocery

This paper studies how online grocers use service time to respond to local competition and demand conditions when prices are uniformly set at the national level. Using comprehensive data collected twice a week over three years from 172 Israeli local markets, we show that an online grocer sets identical prices in all markets. By contrast, service time is shorter in more competitive markets and on low-demand days. Next, we exploit regional and temporal variation in entry decisions to examine how the incumbent adjusts its service time when new online grocers enter the market. The incumbent’s service time falls significantly on low-demand days and in monopolistic markets. This decrease begins shortly before entry and is greater when the entrant poses a larger competitive threat. On high-demand days and in competitive markets we do not find a significant change in service time in the months surrounding entry. Our findings suggest that firms use service time to exercise their local market power when prices are unresponsive and that operational considerations affect the extent to which they respond. This paper was accepted by Joshua Gans, business strategy. Funding: Financial support by Eli Hurvitz Institute of Strategic Management, The Henry Crown Institute of Business Research in Israel, The Maurice Falk Institute for Economic Research in Israel Ltd., Coller Foundation, and the Israeli Science Foundation [Grant 568/17] is gratefully acknowledged. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2022.01820 .

Dynamic Demand Estimation in Auction Markets

Abstract We study demand estimation in a large auction market. In our model, a dynamically evolving population of buyers with unit demand and heterogeneous and privately known preferences for a finite set of differentiated products compete in a sequence of auctions that occur in discrete time. We define an empirically tractable equilibrium concept in which bidders behave as though they are competing with the stationary distribution of opposing bids, characterize bidding strategies, and prove existence of equilibrium. Having developed this demand system, we prove that it is non-parametrically identified from panel data. We extend the model to consider a random coefficients demand system akin to workhorse demand models in industrial organization, and show that this too is non-parametrically identified. We apply the model to estimate demand and show how large sellers can exercise market power by using persistent reserve price policies, which induce higher bids and, therefore, revenues. Our analysis highlights the importance of both dynamic bidding strategies and panel data sample selection issues when analysing these markets.

The Effect of Spatial Competition on Retail Gasoline Prices

This paper explores the nature of retail gasoline market competition in the Russian Federation by applying a detailed panel structure database at the level of individual filling stations. This market is a highly concentrated one, which theoretically enables companies to exercise market power. Furthermore, in most of the administrative districts of the Russian Federation, one vertically integrated oil company will dominate; this is often the company located nearest to its own refinery. Spatial econometric analysis has yielded some interesting empirical results concerning how the local market is affected. First, there is no confirmation of the hypothesis that gas stations compete only with the nearest gas stations. Second, there is strong evidence that stations compete with other filling stations located within five kilometers, and the intensity of competition decreases as the distance between stations increases. A relationship between certain characteristics of filling stations and the price behavior of individual filling stations also became evident. These results suggest that retail fuel prices are influenced by such features of filling stations as brand name and services provided. The conclusion is that the brand name of competing stations and even the geographical distribution of these specific brands are more important determinants of the retail price of gasoline than the number of competing stations.

Price competition and market concentration: Evidence from the land market in China

While localized price competition in many markets has been extensively analyzed, little empirical work has been undertaken in the land market. It is the intent of this paper, therefore, to investigate the nature of spatial price competition among land sellers that compete in concentrated markets within a specific geographical area. Applying spatio-temporal autoregressive model to data from the residential land market in China from 2007 to 2015, we find that, (1) the land market for residential development is highly localized, where land sellers (local governments) respond more strongly to the price changes by “close-by” sellers; (2) larger market share is significantly associated with less spatial price response and higher land price. Placebo analysis using the sample of land supply for industrial development reinforces a causal interpretation of our main findings. Results from this paper permit the conclusion that the supply of land for residential development is not a perfect competitive but a localized competitive market where land sellers controlling a larger share of the market exercise market power to maximize land revenue.

State ownership in liberal economic governance? De-risking private investment in the electricity sector in Mexico

Abandoning some neoliberal reform tools, but not the goals, liberal policymakers have devised forms of economic governance to support private investment through, paradoxically, the use of state-owned enterprises (SOEs). The article builds on a pragmatist perspective of institutional evolution by describing the syncretism in Mexico's 2013 electricity reform as an exemplary case of structural reforms for de-risking investment through the strategic use of the national SOE. The case shows that the technical and legal segmentation of electricity supply can accommodate different risk distribution arrangements in which state ownership is useful to (1) rein-in the capacity of the dominant company to exercise market power, (2) shoulder the costs of maintaining a subsidised tariff structure for retail consumers, and (3) underwrite the expansion of infrastructure with an uncertain economic future. Structural reforms can use SOEs to relocate private risk in the state's ledger and making state de-risking the most important mechanisms to drive investment, and not market competition. The article argues for the need to develop a sector-specific understanding the role of SOEs within liberal economic programs, but also the need to develop a critical perspective, for instance, through Daniela Gabor's Wall Street Consensus concept, to focus on the historical distributional consequences of these arrangements which can result in the progressive private control over the electricity sector.

Optimal Electricity Imbalance Pricing for the Emerging Penetration of Renewable and Low-Cost Generators

Problem definition: With the rise of renewables and the decline of fossil fuels, electricity markets are shifting toward a capacity mix in which low-cost generators (LCGs) are dominant. Within this transition, policymakers have been considering whether current market designs are still fundamentally fit for purpose. This research analyses a key aspect: the design of real-time imbalance pricing mechanisms. Currently, markets mostly use either single pricing or dual pricing as their imbalance pricing mechanisms. Single-pricing mechanisms apply identical prices for buying and selling, whereas dual-pricing mechanisms use different prices. The recent harmonization initiative in Europe sets single pricing as the default and dual pricing as the exception. This leaves open the question of when dual pricing is advantageous. We compare the economic efficiency of two dual-pricing mechanisms in current practice with that of a single-pricing design and identify conditions under which dual pricing can be beneficial. We also prove the existence of an optimal pricing mechanism. Methodology/results: We first analytically compare the economic efficiency of single-pricing and dual-pricing mechanisms. Furthermore, we formulate an optimal pricing mechanism that can deter the potential exercise of market power by LCGs. Our analytical results characterize the conditions under which a dual pricing is advantageous over a single pricing. We further compare the economic efficiency of these mechanisms with respect to our proposed optimal mechanism through simulations. We show that the proposed pricing mechanism would be the most efficient in comparison with others and discuss its practicability. Managerial implications: Our analytical comparison reveals market conditions under which each pricing mechanism is a better fit and whether there is a need for a redesign. In particular, our results suggest that existing pricing mechanisms are adequate at low/moderate market shares of LCGs but not for the high levels currently envisaged by policymakers in the transition to decarbonization, where the optimal pricing mechanism will become more attractive.Funding: R. Belo acknowledges funding by Fundação para a Ciência e a Tecnologia [UIDB/00124/2020, UIDP/00124/2020 and Social Sciences DataLab – PINFRA/22209/2016], POR Lisboa, and POR Norte [Social Sciences DataLab, PINFRA/22209/2016].Supplemental Material: The e-companion is available at https://doi.org/10.1287/msom.2021.0555 .

Trade reform, oligopsony, and labor market distortion: Theory and evidence

In a heterogeneous-firm model with oligopsonistic local labor markets, this paper shows that opening up to trade can affect distortion in such markets. The distortion arises because firms are large and able to exercise market power over their local workers. Using a panel dataset of Chinese manufacturing firms from 1998 to 2007, I measure firm-level labor market distortion and examine their evolution following China's trade policy reform in 2001. I find that labor market distortion is pervasive and the trade policy reform has led to a net reduction of the distortion in China's manufacturing sector, with a larger and significant effect working through the liberalization of input tariffs.

Market Power Mitigation in Transmission Expansion Planning Problems

The exercise of market power through network constraints in electricity markets can lead to high energy prices far from competitive prices. Traditional transmission expansion planning problem formulations do not consider strategic behavior of market agents. Therefore, they cannot capture the potential exercise of market power. In this paper, a predictor-corrector iterative algorithm is proposed to deal with market power mitigation in market-oriented transmission expansion planning problems. The predictor step consists of the solution of an equilibrium market model based on the conjectured supply function. The corrector step is a conventional transmission expansion planning posed as a mixed integer linear programming problem, where the feasible region is dynamically updated taking into account the results from the predictor step. Lerner index and other indices are used to quantify the potential market power. The algorithm finds the minimum cost expansion plan that avoids the exercise of market power through network congestion. The cost of this expansion plan is only slightly greater than the cost of a conventional expansion plan. The approach is illustrated using the 6-Bus Garver and the IEEE-24 RTS test systems.

The Oligopolistic Behavior of Kazakh and Russian Wheat Exporters in the South Caucasus: Evidence from a Residual Demand Elasticity Analysis

This study looks at whether Kazakh and Russian wheat exporters leverage their dominant share of the wheat markets in the South Caucasus to exercise market power. We apply a three-stage estimation for systems of simultaneous equations and Zellner’s seemingly unrelated regression to analyze residual demand elasticity. The results of both estimations provide empirical evidence of Russian market power in the wheat markets of the South Caucasus but no evidence of a Kazakh oligopoly. Russian exporters possess greater market power in Armenia than in Georgia. Market power depends on the presence of competitors in the destination market. The results show that Kazakh exporters restrict the market powers of Russian exporters in the Azerbaijani wheat market, while Russian exporters constrain the market power of Kazakh exporters in the Azerbaijani and Georgian wheat markets. Ukrainian wheat exporters are able to intervene in the market powers of Russian exporters in Azerbaijan and Georgia, while they restrict Kazakh oligopoly in the Georgian market. Some export restrictions imposed by wheat exporting countries significantly affected competition in wheat importing countries. Russia’s ongoing war against Ukraine and the blockade of Ukrainian ports on the Sea of Azov and the Black Sea are restricting wheat trade, severely damaging Ukraine’s competitiveness and export potential, and reducing food security in the South Caucasus, the Middle East, and North Africa.

Flexible supply meets flexible demand: prosumer impact on strategic hydro operations

Ambitious climate packages promote the integration of variable renewable energy (VRE) and electrification of the economy. For the power sector, such a transformation means the emergence of so-called prosumers, i.e., agents that both consume and produce electricity. Due to their inflexible VRE output and flexible demand, prosumers will potentially add endogenous net sales with seasonal patterns to the power system. With its vast hydro reservoirs and ample transmission capacity, the Nordic region is seemingly well positioned to cope with such intermittent VRE output. However, the increased requirement for flexibility may be leveraged by incumbent producers to manipulate prices. Via a Nash-Cournot model with a representation of the Nordic region’s spatio-temporal features and reservoir volumes, we examine how hydro producers’ ability to manipulate electricity prices through temporal arbitrage is affected by (i) VRE-enabled prosumers and (ii) the latter plus a high CO_2 price. We find that hydro reservoirs could exploit prosumers’ patterns of net sales to conduct temporal arbitrage more effectively, viz., by targeting periods in which prosumers are net buyers (net sellers) to withhold (to “dump”) water. Meanwhile, a higher CO_2 price would further enhance hydro reservoirs’ market power because flexible price-taking thermal plants would be unable to ramp up production in order to counter such producers’ strategy to target VRE’s intermittency. Hence, in spite of a flexible demand side to complement additional intermittent VRE output, strategic hydro producers may still exacerbate price manipulation in a future power sector via more tailored exercise of market power.

Rivals’ Exit and Vertical Merger Evaluation

Abstract We discuss a subset of vertical mergers, where the exercise of market power and the efficiencies enabled by a vertical merger reduce rivals’ profits, making rivals’ exit a potentially serious concern. Rivals’ exit can fundamentally alter the welfare analysis of vertical mergers due to the reduction in product variety to consumers and the reduction in the number of competitors that would otherwise exert downward pricing pressure. An exit-inducing vertical merger might reduce welfare even if it is a welfare-enhancing merger absent exit. We present a theoretical framework to analyze vertical mergers that focuses on the possibility and consequences of exit, discuss the antitrust implications for merger evaluation, and provide examples. We argue that the possibility of rivals’ exit should be an integral part of the analysis of vertical mergers.

Monopsony Power and Coordination in the Broiler Industry

The production of broilers is a well-known example of integration of food processors with growers. Tournament contracts are the norm in the industry, where processors provide chicks, feed, and veterinary supplies to the growers. The industry has come under antitrust scrutiny on several cases where processors have allegedly colluded to exercise market power both in the input and in the output markets and unilaterally exercised monopsony power. This article discusses the possible role that the integration model of contracting with growers may have on the monopsony power and collusion in the input market. In the case of confirmed collusion at the input market, damage compensation may be due. We present formulae that may be used to calculate damages in a buyer cartel.

Countervailing Market Power and Hospital Competition

Abstract While economic theories indicate that market power by downstream firms can potentially counteract market power upstream, antitrust policy is opaque as to whether to incorporate countervailing market power in merger analyses. We use detailed national claims data from the health care sector to evaluate whether countervailing insurer power does indeed limit hospitals' exercise of market power. We estimate willingness-to-pay models to evaluate hospital market power across analysis areas. We find that countervailing market power is important: a typical hospital merger would raise hospital prices 4.3% at the 25th percentile of insurer concentration but only 0.97% at the 75th percentile of insurer concentration.

깐마늘 가공업체의 시장지배력 분석

In this study, a profit maximization model is established by setting a representative peeled garlic processor. An empirical model is developed to estimate the market power exercised by these processors. The analysis results indicate that peeled garlic processors exercise market power when they are purchasing raw material and selling the processed products. The fact that peeled garlic processing companies exercise a market power suggests that they are exploiting a considerable amount of excess profits over marginal cost

Energy storage operation and electricity market design: On the market power of monopolistic storage operators

The rapid growth of the share of energy generated via renewable sources highly challenges grid stability. Flexibility is key to balance the electricity supply and demand. As a relatively new player in the energy market, the Energy Storage System (ESS) is capable of providing such flexibility, acting as both a consumer and producer. Since the Directive (EU) 2019/944 of the European Union requires ESSs to be operated by an independent market player, ESSs are becoming an important player in different electricity markets. Crucially, it is difficult for, e.g., market-monitoring authorities, to compare the bid cost functions to the true opportunity costs of an ESS. Motivated by this, in this paper we elaborate on the potential of an ESS to exercise market power in a liberalized electricity market. In particular, we analyze how a monopolistic ESS operator may influence short-run market outcomes, e.g., prices and system costs, depending on different market designs including a nodal, a zonal, and a uniform pricing system. For this purpose, we propose a four-stage Stackelberg game where the monopolistic ESS operator first decides on its day-ahead market bids (level 1), followed by day-ahead market clearing (level 2), after which the ESS submits bids to the real-time balancing market (level 3), which is then cleared (level 4). Relying on a widely used case study, we illustrate that some market designs may be more favorable for the ESS operator, whereas other ones may be more attractive from the regulator’s point of view of minimizing the overall system costs.

Regulating Competition in the Digital Platform Economy: Russia and China Compared

ABSTRACT In many countries, the rapid evolution of digital platform technology has triggered significant shifts in competition law. Many have interpreted China’s recent moves as signaling a broader crackdown on private entrepreneurship. In Russia, even before the invasion of Ukraine, government policy became increasingly restrictive toward foreign internet platforms. This paper analyzes the development and enforcement of competition law in Russia and China. We show that both technologically driven changes in the ability of digital platform firms to exercise market power and changes in the external political environment affect the relative strength and coalitions of interested bureaucratic actors and influence policy outcomes.

Strategic investment decisions in an oligopoly with a competitive fringe: An equilibrium problem with equilibrium constraints approach

Modern wholesale electricity markets often have producers who exercise market power. The standard way to model market power in an oligopoly with a competitive fringe is by using Mixed Complementarity Problems (MCPs) and conjectural variations. However, such models can lead to myopic (sub-optimal) behaviour for oligopolists. We first build on existing literature to show that an oligopoly with a competitive fringe where all firms have investment decisions will also lead to myopic behaviour when modelled using MCPs with conjectural variations. To overcome this issue, we develop an Equilibrium Problem with Equilibrium Constraints (EPEC) to model such an electricity market structure. The EPEC models two types of players: price-making firms, who have market power, and price-taking firms, who do not. Our model is the first in the literature to consider an oligopoly with a competitive fringe where all firms have investment decisions. Our results indicate that an EPEC can model investment decisions in an oligopoly with a competitive fringe more credibly and thus overcome the myopic behaviour observed in MCPs. The EPEC found multiple equilibria for investment decisions and firms’ profits. Despite this, market prices and consumer costs were found to remain relatively constant across the equilibria. A further contribution of the modelling approach is that it shows how it may be optimal for price-making firms to accept losses in some time periods in order to disincentivize price-taking firms from investing further into the market. We conclude our paper with a discussion of the computational limitations of our approach.