Exercise Of Market Power Research Articles

Evaluating the Impact of Bilateral Contracts on the Offering Strategy of a Price Maker Wind Power Producer

Due to the high penetration of wind power generation in power systems and electricity markets, wind power plants (WPPs) can, in some scenarios, influence the market prices and exercise market power in the day-ahead (DA) market. In order to evaluate the capability of WPPs to directly act as price-maker, this article proposes the strategic offering of a WPP in the DA market by using a bilevel stochastic optimization approach. The primary objective of the proposed model is to maximize the WPP's expected profit by strategically offering in DA market while minimizing the energy deviations in the regulating market. Moreover, the WPP can also sign bilateral contracts with customers to supply their required energy. In the subproblem, the system operator tends to minimize the sum of the total generation costs minus the sum of the total demand benefits. The effect of bilateral contracts on the strategic offering of WPP in the DA market and its impact on the transmission margin are also investigated. Results on real cases show that when the WPP enters into a bilateral contract, it should consider the effect of such contracts on the offering strategy to the DA market. The effects of bilateral contracts on the regulating market are also examined.

탄소배출권 시장과 연동된 전력시장에서의 시장가격 분석모형 연구

Emissions allowance trading has been used to assist in mitigation of greenhouse gas emissions. The scale of emissions from thermal power plants accounts for a large proportion of the total, so power generations in an electricity market play an important role in an emissions trading market. It is well known that competitive generations exercise market power in the oligopolistic electricity market. The competitive generations affect to exercise market power even in the emission trading market due to the coupled markets with the electricity market. This study proposes a coupled model for analyzing the competitive operation of power generation in terms of supply and demand for emissions allowance. According to case studies, it is shown that market power of power generations appears in the emissions trading market through the calculation of the Nash equilibrium in the proposed model.

Multi‐unit ownership and market power: A study of the lodging industry in Texas

AbstractAs franchisees in the retail and service industries become experienced and acquire local market knowledge, they are likely to own multiple franchised units. Given non‐ (or weak) exclusive clauses in franchising contracts or industry norms, some of these multi‐unit owners are affiliated with multiple franchisors. Agency and transaction cost theories, the classic theoretical framework to analyze franchising, cannot explain this type of multi‐franchisor affiliation because this type of ownership would create incentive problems across franchisors. Conversely, this paper investigates whether this type of the multi‐unit ownership can be explained by the exercise of market power by these franchisees. We test this hypothesis in geographically clustered markets (hotels near the interstate highway exits), where multi‐unit ownership is common. We first show that multi‐unit owners affiliated with multiple franchisors charge higher prices than other franchisors. Then, in our main analysis, we show that one explanation for this pattern is the existence of market power: Without multi‐unit ownership, prices at these hotels would decrease by 9%, on average (and market‐level volume sales would increase by 7.52%). These results help explain why franchisors might be willing to engage in franchising contracts with franchisees that operate units associated with different franchisors.

Data envelopment analysis and stochastic equilibrium analysis for market power investigation in a bi-level market

This study investigates how the exercise of market power affects the economic efficiency and revenue sharing in a bi-level market, which integrates upstream contract market and downstream wholesale market. We consider price volatility and identify Nash equilibrium restricted by the data envelopment analysis (DEA)-estimated capacity constraint. This study develops stochastic mixed complementarity problems (MiCP) models embedded with stochastic programming (SP) and robust optimization (RO) to address price uncertainty in a bi-level market. We investigate the exercise of market power: (1) wholesalers as leaders or (2) bilateral market power between manufacturers and wholesalers. A numerical study of the power generation market is conducted to validate the proposed stochastic MiCP models. The results show that price uncertainties in the upstream contract market have a significant effect in a bi-level market, and thus controlling price volatility in the upstream contract market will improve productivity and support policies. In addition, we suggest the wholesalers should be market leaders and the manufacturers should negotiate profit-sharing contracts with the wholesalers in a deregulated system.

The Elusive Explanation for the Declining Labor Share

A vast literature seeks to measure and explain the apparent decline in the labor share in national income that has occurred in recent times in the United States and elsewhere. The culprits include technological change, increased globalization and the rise of China, the enhanced exercise of market power by large firms in concentrated product markets, the decline in unionization rates and the erosion in the bargaining power of workers in labor markets, and the changing composition of the workforce due to a slowdown in population growth and a rise in educational attaintment. We review this literature, with special emphasis on the pitfalls associated with using cross-sectional data to assess this phenomenon and the reasons why the body of papers collectively explains the phenomenon many times over.

Multimarket Contact and Welfare Implications for Airline Passengers

Abstract When conducting routine welfare analysis, regulators typically associate the exercise of market power to internal market characteristics such as market shares. However, some researchers argue that factors that are external to a market such as contact across markets may have an impact on market outcomes. An interesting but unanswered question is: how do cross-market factors such as multimarket contact affect consumer welfare? Using a nested logit demand model for air travel, we are able to monetarily estimate the consumer welfare effects of multimarket contact. We find that multimarket contact results in a consumer welfare loss of $0.57 per contact. Extrapolating this welfare cost across consumers and across products proves to be quite sizeable. These negative welfare effects are stronger in long haul markets.

Strategic behavior in market-based redispatch: International experience

This study reviews international experience with market based redispatch. It focuses on two manifestations of strategic behavior: abuse of market power and so-called inc-dec gaming. Two central arguments are derived from the review. First, reviewed countries explain strategic behavior by the lack of competition within congestion regions and primarily as a result of market power. Inc-dec gaming, if present, is recognized as a problem only in combination with market power exercise. Second, strategic behavior can be effectively addressed with countermeasures. In result, the potential for strategic behavior within market based redispatch does not seem to justify rejecting its implementation.

Estimating the adequacy revenue considering long-term reliability in a renewable power system

The growing participation of variable renewable sources, with production costs close to zero, requires the review of electricity markets to guarantee security of supply. This work evaluates the dependence on additional revenue of different technologies that provide long-term reliability in a predominantly hydropower system, with model-based spot price, that considers generators variable production cost, and price cap. Using the future configuration of Brazilian Ten-Years Plan, each technology's revenue is estimated and then compared with investments required. Results demonstrate that, in systems with this market design, only technologies with a high dispatch factor can cover the investments solely with revenues from selling their production. For wind and solar plants, in 35% of scenarios, this income is sufficient to cover the investments. On the other hand, thermopower has more than 90% of scenarios where net income is nil, indicating that adequacy remuneration should cover investments. Battery storage and demand response are also analyzed. As the final income for a project will be given by the sum of different revenues, technologies that don't depend on a certain product may exercise market power and render ones that depend on that revenue infeasible, even if this solution isn't the most efficient for the system.

Generation Expansion Planning Considering Competition and Market Power

One of the main goals of establishing electricity markets is to increase efficiency, and another is to lower the prices of electricity by ensuring competition. Protecting and improving the competitive environment of the market help in achieving these goals. If any of the generation companies in the market can exercise market power, the competition will then decrease and may even disappear. This study offers an optimization model minimizing the market power of all companies. The model can be utilized from the beginning of the liberalization of the electricity sector or during the transformation process from the monopoly to the competitive markets. It is a mixed-integer linear programming model where the bi-level structure of the problem is transformed so that the lower-level and the upper-level are combined in a single level. The lower-level model minimizes investment and production costs of companies. The upper-level maximizes the competition between all companies by minimizing market power. A numerical example is presented and discussed to test the effectiveness of the proposed model and to evaluate the results. Two scenarios are examined in which companies do and do not have budget restrictions. The results show that the model works successfully in both scenarios, and the market power of all companies is decreased so that none can distort competition. However, the second scenario, in which the state-owned company has a budget limit, is more successful in terms of satisfying not only the state and private companies but also consumers. The companies that were small at the beginning have higher shares in the second scenario and the shares of bigger companies are decreased significantly. Also, the second scenario was able to meet the investment needs from a lower level, and investments were shifted to private firms, thus saving investment expenditures of both government and private firms. Furthermore, in both scenarios, prices tend to decrease toward the target year, but the second scenario can keep prices much lower.

COVID-19 lockdown and market power in the Italian electricity market

The Italian electricity market was characterized by a remarkable decrease in demand during the COVID-19 lockdown (10 March to 2 June 2020). There were also negative peaks of over 50% and record low prices of about 20 Euro/MW. This paper aims to investigate the exercise of market power in the Italian power exchange during the pandemic, explicitly considering transmission line congestion, and disentangling the measure of the unilateral market power from congestion rent and re-dispatching costs.We computed the Zonal Lerner Index for every hour in January–June 2020 for the main operators on the supply and the demand side in the Italian day-ahead market. Furthermore, we analyzed the correlation between market power, congestion, and the effect of COVID-19. The results showed that the exercise of market power on the supply (mark-up) and demand (mark-down) sides were considerably weakened during peak hours by massive demand reduction. However, it was surprisingly reinforced during emergency periods in specific off-peak hours.Overall, the main players have somehow increased the intensity of market power during the COVID-19 pandemic crisis, which calls for more pro-competitive action by the regulatory authority and paying more attention to heterogeneous players’ behaviors.

Output market power and firm characteristics in dairy processing: Evidence from three EU countries

AbstractThe dairy processing industry is the largest subsector in the EU food industry and is characterised by high concentration. We investigate the extent of output market power exerted in EU dairy processing, applying an advanced stochastic frontier approach to estimate firm‐level markups of price over marginal cost using data for France, Italy and Spain from 2008 to 2017. We further relate markups to firm characteristics to identify what type of dairy processors possess the highest power in the sector. Our findings only reveal small average deviations from perfect competition but we find considerable heterogeneity of markups within and between the three countries. We identify a strong positive relationship between markup and profitability, though we find firm size and markups to be inversely related. This indicates that small firms operating in differentiated niche markets are able to charge higher markups, thereby ensuring their profitability. This result can serve EU dairy processors for future strategic alignment, and is particularly interesting from a policy perspective as large firms are mostly blamed in the exercise of market power in public and policy debates.

Sheep in wolves' clothing: Using false signals of demand to execute a market power manipulation

AbstractExisting formal models of market power manipulation (“corners”) focus on the “delivery end game,” but largely ignore the path to that game. Expectations about the end game matter. The delivery supply curve determines a large long's market power in the end game, and the delivery supply curve depends on what market participants expect the long will do with deliveries. If there is uncertainty about whether a long stands for delivery because he has a high demand for the commodity, and will consume it, or is manipulating, a manipulator can mimic a high value type (“strong stopper”) and exercise market power. Crucially, in the presence of this uncertainty, a long can exercise market power even if his position is smaller than deliverable supplies. This result calls into question legal precedent which typically requires a long to have a position larger than deliverable supply to find him guilty of manipulation.

Platforms, Power, and Promotion: Evidence from Spotify Playlists*

Many online markets are dominated by a handful of platforms, raising concerns about the exercise of market power in the digital age. Spotify has emerged as the leading interactive music streaming platform, and we assess its power by measuring the impact of its promotion decisions – via platform‐operated playlists – on the success of songs and artists. We employ discontinuity and instrumental variables identification approaches and find large and significant effects of playlist inclusion on success. Our results provide direct evidence of a prominent platform's power and suggest a need for continued scrutiny of how platforms exercise their power.

Market power assessment in electricity markets based on social network analysis

In a non-competitive electricity market environment, market players, especially generation companies (GenCos) try to act strategically and exercise market power. Therefore, it is essential for regulators to monitor the strategic behavior of market participants. This paper proposes a comprehensive approach for market power detection based on a centrality concept in social network analysis (SNA). The proposed centrality-based indices are employed to develop structural and behavioral market power measures. Moreover, these indices are compared with basic market power indicators (share, Residual Supplier Index (RSI), and Entropy) using the Spearman correlation index to evaluate their effectiveness.The proposed method is tested on IEEE 30 bus standard test system and the proposed indices are calculated for both supply-side and demand-side participants. The obtained results show that SNA can be used as an effective tool for monitoring the market power in future smart grids with plenty of players and complexity.

Optimal bid-offer strategy for a virtual energy storage merchant: A stochastic bi-level model with all-scenario feasibility

Increased penetration of renewable resources emphasizes opportunities for virtual energy storage (VES) to offer the needed flexibility to the power system. The VES, quite common in China, is in fact the large electricity industrial consumers with a thermal source of electricity generation that allows them to self-supply. The emerging VES concept breaks through the traditional self-supply off-grid status and enables them to interact with the grid as storage facilities by modulating their power source and load in bi-direction. Within this context, this paper analyzes the implications of the strategic participation of a price-making VES with the ability to exercise market power in the electricity market. We develop a stochastic bi-level optimization model, which presents the VES profit-maximization problem, subject to a day-ahead energy clearing optimization under renewable uncertainty. An all-scenario-feasible stochastic (ASFS) method is applied for the first time to the bid-offer problem to deal with the uncertainty, guaranteeing the feasibility of decision making for all scenarios. The proposed stochastic decision-making model is evaluated by using two illustrative test systems and a practical case based on Gansu Province, China. Numerical results reveal the various abilities of the VES merchant in different operating modes in manipulating the market power and gaining profits from price arbitrage under uncertainty. Our proposed model and approach provide an insight for the market operator to track the behaviors of the VES into the market clearing process and to evaluate the portfolio value of VES in spatio-temporal coordination of electricity production.

Market Power in the Irish Beef Processing Industry

Irish beef processors and cattle farmers have been involved in a lasting controversy on power asymmetry. This paper estimates the degree of market power in the Irish beef processing industry. The New Empirical Industrial Organization approach is extended for estimation, and the market power is testified by conjectural elasticity with supply and demand functions, indicating that beef processors exert a significant market power on cattle farms. Export-orientation and high subsidies are two outstanding features in the Irish beef industry. Exports and subsidies are shown in this paper to have an insignificant influence on market power. This paper confirms that beef processors can exercise market power on farmers to lower prices below the marginal cost.

Offer Price Information and the Exercise of Market Power: The Effect of the Publication of the Historical Trading Report on Competition in the Alberta Electricity Market

This paper considers the effect of the publication of offer price information on unilateral market power in Alberta’s electricity market. This market is an hourly auction characterized by repeated interaction among a small number of producers, common knowledge of costs and production capabilities, and price inelastic demand. For the period July 13, 2000 to May 18, 2017, offer prices for each hour were published by the market operator, the Alberta Electric System Operator (AESO), in the Historical Trading Report (HTR) after the end of the hour. Using counter-factual analysis from 2010 to 2015 (52,584 hours), the paper finds that the effect of offer price changes after the HTR publication was to raise the average hourly price for electricity in Alberta by $2.48/MWh or about 4.2%, which raised the cost of electricity for Alberta consumers during the six-year period by approximately $1.14 billion. Based on an earlier version of this paper, the AESO was instructed by Alberta’s utilities regulator to cease publication of the HTR.

Competition in the Italian electricity market: The unforeseen social welfare losses of reform

The worldwide wave of reforms investing power industry has created new challenges to both supply demand side management. After deregulation, electric utilities restructured their opera-tions from vertically integrated mechanisms to open market systems in order to establish a new competitive sector. Reform has involved also the Italian power sector, but competition, as lar-gely shown by the empirical literature particularly in the first years of reform, has been far to be reached, and the electricity markets has been characterized by conditions of oligopoly and exercise of market power. This paper aims to analyze welfare loss and deviation from the competitive equilibrium recorded in the day ahead Italian electricity market after the first wave of reforms was almost implemented. The study presents a theoretical and empirical model to construct a competitive equilibrium, estimating market power, both, on the supply and demand sides of the day ahead electricity market. Results show the effect of non-competitive equilibriums for the hourly markets in the period 2013-2014. In an ideal competitive market, prices would be lower than historical prices by about 2-5% and quantities would be higher by about 0.5-1%.

Strategic behaviors and transfer of wholesale costs to retail prices in the electricity market: Evidence from Colombia

This paper estimates the pass-through of prices from wholesale to retail using monthly data for the period January 2017–March 2020 for residential users in the Colombian electricity market, which is characterized by large hydroelectric capacity and inelastic demand. Although much of the literature has found the pass-through rate to be incomplete, results are consistent with other studies that have been conducted for electricity markets and have shown that firms have no incentive to adjust their profit margins in the face of a cost shock. These results also converge with the regulatory framework of the retail electricity market in Colombia. In particular, the results reveal that the cost pass-through is more than complete with a rate of 115%. There is also evidence of an increase in the magnitude of the cost pass-through year by year. When analyzed by type of retailer, the results suggest that the cost pass-through of two major dominant and vertically integrated retailers is statistically higher than the remaining retailers with a pass-through close to 120%, suggesting that dominant retailers integrated with power generation could exercise market power.

Privacy as a Competition Law Concern: Lessons from Facebook/WhatsApp

In the era of digital markets, companies are able to collect an unprecedented amount of personal information about their customers. With big data increasingly being employed in all areas of the economy, competition authorities face the question of how prominently data are to feature in competition cases. Data has played a role in a number of recent merger decisions, such as the Facebook/Whatsapp case, Google/DoubleClick case and Microsoft/Linkedin case, as well as in the recent Bundeskartellamt’s abuse of dominance investigation into Facebook. In the meantime, competition authorities face a growing public concern regarding the large amounts of data that online platforms gather about their users, and what this means for users’ privacy protection. One factor is the uncertainty regarding online platform’s privacy strategies,. Another is users’ lack of power in influencing privacy settings. Moreover, recent large-scale data security breaches have put further pressure on public authorities to regulate powerful, data-rich online platforms. This paper examines to what extent these privacy violations are a result of the exercise of market power, and what this means for competition law enforcement. Against the background of recent cases, the paper considers what the role of competition authorities should be in regulating data-based market power. Specifically, the paper evaluates the efficacy and suitability of tools such as merger review and abuse of dominance in dealing with data as a potential source of market power. The paper finally examines to what extent a stricter ex ante approach – consisting of critically reviewing mergers between data-rich companies – could reduce the number of ex post abuse of dominance cases related to data, and whether such an approach would be desirable.