Market Power Index Research Articles

Strategic market power of firms in imperfect markets

Studies dealing with the market power of a firm depend on the elasticity of demand even when market imperfection is acknowledged. This study suggests that a firm derives its market power due to its interface with consumers on the market as well as its interaction with rival firms on the market. As a result, its market share and market power over a unit of sales in the industry require attention in the context of imperfect markets. Similarly, non-price strategies of firms offer some market power that should be incorporated in the definition. Thus the modified market power indices are a significant contribution to the theoretical results.

A Bilevel Stochastic Optimization Framework for Market-Oriented Transmission Expansion Planning Considering Market Power

Market power, defined as the ability to raise prices above competitive levels profitably, continues to be a prime concern in the restructured electricity markets. Market power must be mitigated to improve market performance and avoid inefficient generation investment, price volatility, and overpayment in power systems. For this reason, involving market power in the transmission expansion planning (TEP) problem is essential for ensuring the efficient operation of the electricity markets. In this regard, a methodological bilevel stochastic framework for the TEP problem that explicitly includes the market power indices in the upper level is proposed, aiming to restrict the potential market power execution. A mixed-integer linear/quadratic programming (MILP/MIQP) reformulation of the stochastic bilevel model is constructed utilizing Karush−Kuhn−Tucker (KKT) conditions. Wind power and electricity demand uncertainty are incorporated using scenario-based two-stage stochastic programming. The model enables the planner to make a trade-off between the market power indices and the investment cost. Using comparable results of the IEEE 118-bus system, we show that the proposed TEP outperforms the existing models in terms of market power indices and facilitates open access to the transmission network for all market participants.

A unit commitment based-co-optimization of generation and transmission expansion planning to mitigate market power

• A unit-commitment-based generation and transmission expansion planning model is proposed. • The planning problem is subject to the market power's constraint. • The scenario-based model is structured as a mixed-integer bi-level programming (MIBP). • The lower-level problem computes the must-run generation (MRG) as a market index. • An exact algorithm using the reformulation-and-decomposition technique is utilized to attain the optimal solution. This paper aims to construct a novel strategy for coordinated generation and transmission expansion planning (CGTEP) considering market power. The integrated model constitutes bi-level programming from a centralized planning point of view. The upper level seeks to minimize the investment and operation cost subject to technical constraints, while the lower level's objective is to mitigate the market power. A stochastic unit commitment-based approach is employed at the upper level to find the least-cost solution and at the lower level to minimize the transmission-constrained market power index. Since the lower level contains integer variables, it is impossible to utilize the Karush-Kuhn-Tucker (KKT) conditions or duality theory (DT) to convert the bi-level problem into a single level. Hence, an exact algorithm using the reformulation-and-decomposition technique (RDT) is utilized to attain the optimal solution to this complex mixed-integer bi-level programming (MIBP) problem. The IEEE 118-bus electric power network is used for numerical studies. Results from the numerical studies signify the effectiveness of the presented model showing that a well-designated power system can significantly mitigate market power.

Digitalization of corporate business of Ukrainian banks

Introduction. Increasing competition bet­ween banks requires the introduction of banking products with a new service and economic design, based on modern software, technology and information platforms. Problem. Digitalization is becoming a key trend in conducting business for banks and their corporate clients. The aim of the study is to cluster banks by the level of digitalization and determine the relationship between it and indicators of market power, financial performance and cre­dit risk. Methods. Input normalized indicators for 32 banks of Ukraine, determined using the MINIMAX methodology, were used. The study was based on correlation-regression and cluster analysis. Results. The information base for calcu­lating the digitalization index for banks in the focus group was chosen based on the number of: the number of visitors to banks’ websites, regis­tered users of banks’ mobile applications (inclu­ding for legal entities and individuals), branded online inquiries, banking self-service devices, sub­scribers of banks in social media networks. When determining the level of digitalization in corpo­rate business, only two indicators were used: the number of registered legal entities that use mo­bile bank applications and the number of brand-name online searches for each of them. Three hypotheses were put forward and their empirical verification was carried out, accor­ding to the results of which it was established that there is a moderate correlation between the digitalization index and the credit risk indicator and a low correlation between the digitalization index and indicators of financial performance and market power. Among the financial indi­cators a noticeable correlation was found only between the level of the interest margin and the level of digitalization. Conclusions. For most of the banks in the focus group, a low level of digitalization is inhe­rent in the corporate business. It is proposed to develop a strategy for the development of the corporate business of banks on a new techno­logical platform, which will make it possible to extend digitalization processes not only to typi­cal, but also to exclusive financial services pro­vided to corporate clients, taking into account their individual service.

Estimating the degree of firms’ input market power via data envelopment analysis: Evidence from the global biotechnology and pharmaceutical industry

This study estimates input market power by introducing an input-market-based Lerner index based on data envelopment analysis (DEA). This index is an extension to the DEA-based Lerner index. In doing so, we develop a revenue function, which is based on minimum distance framework. DEA based-Lerner indexes are commonly based on efficiency measures aiming at finding the “farthest” strongly efficient point. However, if firms operate in non-optimal scales, then such a methodological treatment can be restrictive. In our case, we adopt the minimum distance. We utilize a strongly revenue-efficient frontier and model a DEA based Lerner index which is less restrictive. We apply our index to a sample of global biotechnology and pharmaceutical (B&P) firms over the period 2015–2019. We further investigate the effect of firms’ research and development (R&D) on firms’ market power estimated by the input-market DEA-based Lerner indexes. Our findings suggest that the investment on R&D has a nonlinear effect on firms’ market power. Finally, our finding suggest that the positive effect of R&D is more pronounced on the estimated firms’ employees-based market power compared to the asset-based market power index.

Multiple Electricity Markets Competitiveness Undergoing Symmetric and Asymmetric Renewables Development Policies

This paper scrutinizes the impact of different renewable energy sources (RES) development policies on competitiveness within multiple electricity markets (MEMs). Also, the variation in market power indices by increasing the integration of the markets undergoing symmetric and asymmetric RES development policies is investigated. To do so, several stochastic mixed-integer non-linear programming objective functions are used in the agent-based simulation framework to model the power plants’ behavior and markets. The case study shows in the low RES penetrated markets, one can say the more integration level of the markets, the lower potential of exercising market power. The reciprocal judgment is true for a high RES penetrated market. Also, large asymmetry in RES development between markets within MEMs may bring about market power problem for a high RES penetrated market. Unlike the asymmetric RES development policies, adopting homogeneous policies in RES development within MEMs reduces the market power potential in all markets and this potential decreases with the increase in the integration of the markets.

Proposing new analyticalprice‐basedmarket power and coalition indices based onLMPshare indouble‐sidedpower market

One of the strategic actions to gain more profit in the electricity market is to exercising market power as a leverage in exclusive situations. The main goal of this article is to assess load serving entities market power via self-action scramble by price-based indices as an application of the structural decomposition approach. In addition, the possibility of forming a beneficial coalition due to the cross interactions between players can be evaluated using the proposed indices. These coalitions may be occurred between two generation units, two load serving entities, or a generation unit and a load serving entity. The cumulative sharing impacts of one load serving entity on the locational marginal prices of all units owned by a GenCo is also defined as a new index. To achieve this goal, the first step is to extract the structural decomposition coefficients of market components consisting of suppliers, inelastic, and elastic loads, which determine the contribution of all players on the electricity price separately. In the second step, new structural indices to determine self/cross-share index of each player in the electricity price based on the contributing factors obtained from the decomposition process. So, it is possible for market operator to prioritize the potential of exercising market power and forming coalition with a price-based index for both-sides players. As well, it is important for market operators to explore the economic justification of relationships between players to prevent market deviation. The proposed approach is evaluated on the IEEE 24-bus system, and the results are discussed.

Variation of market power across different food supply chains

Research background: The analysis of the competitiveness between producers, processors and retailers in food supply chains has always been drawing a high level of attention. It has become even more topical issue for researchers and policymakers after the global food crisis in 2008. Purpose of the article: The goal of this paper is to analyse empirical studies of market power and to investigate if some supply chains are systematically more prone to excessive market power than others. Methods: For this study, we have collected a wide range of recent studies investigating the processors’ market power index in the food supply chains. In total, in our analysis, we used 472 unique market power index estimates and employed various linear regression models to investigate their determinants. Findings & Value added: Our findings suggest that, on average, the reported degree of market power in the USA is almost twice as high as in other countries. At the same time, market power estimates related to the meat, dairy and horticulture industries are systematically higher than the ones related to other supply chains. Finally, we observed that, on average, supply chains related to highly perishable products tend to have lower market power estimates associated with them, than other supply chains. Our results have important implications for future investigation of the structural source of market power and unfair trade practices.

ДІАГНОСТИКА СТРАТЕГІЧНОЇ ПОЗИЦІЇ ПІДПРИЄМСТВ МОЛОКОПЕРЕРОБНОЇ ГАЛУЗІ

The article, on the example of enterprises of the dairy industry of Ukraine, substantiates the need in modern conditions of diagnosis of their strategic position. In particular, to determine the criteria for developing a competitive strategy of the dairy industry, it is recommended to use a matrix of strategic prospects for enterprise development not only taking into account indices of financial stability and market power of the company, but also using anti-crisis management. This, first of all, applies to the category of "life cycle of the enterprise", as this type of management is carried out at all stages of its development, having at each of them its specific nature of manifestation. Therefore, we have built an algorithm for determining the phase of the life cycle based on the use of basic ratios of financial indicators, which allow to take into account the specifics of the viability of the enterprise in a changing environment: the ratio of total costs to total revenues; the ratio of the point of critical sales to net income; ratio of equity to assets (coefficient of autonomy); the ratio of borrowed capital to equity (financial risk ratio); the ratio of cash and cash equivalents to current liabilities (absolute liquidity ratio); the ratio of working capital to inventories; the ratio of growth rates of receivables for goods, works (services) to net income; the ratio of terms of repayment of receivables for goods, works (services) to the terms of repayment of accounts payable for goods, works (services); the ratio of net income to the average annual value of current assets (turnover ratio of current assets); the ratio of working capital to equity. The developed criteria for diagnosing the strategic position of enterprises taking into account the life cycle phase allow to supplement the traditional analytical tools for making sound management decisions and are quite important, given the large number of external and internal factors that lead to change. A timely defined strategic position can have a real impact on life cycle change, a refined strategy will provide opportunities to improve financial condition, eliminate shortcomings in business processes and reach a qualitatively new level of management. The use of innovative technologies, or the development of new competitive products, is likely to change the position of the business. In traditional industries, such as the dairy industry, each phase of the life cycle can last for decades, while for high-tech industries it can only take months. Therefore, when diagnosing the strategic position of the enterprise it is necessary to take into account not only the financial and market situation, but also the phase of the life cycle.

Advantageous Symmetric Cross-Ownership

We model an industry where a subset of firms is interlinked via a reciprocal and symmetric share exchange agreement. A merger aiming at acquisition of market power can be reproduced by the same firms under a symmetric cross-ownership scheme. Both concentration and market power indices increase due to cross-ownership. Under linear demand, a non-controlling symmetric cross-ownership scheme is always advantageous to its members if at least 0.58 (1+n) firms in an n-firm industry participate. The threshold drops to (1+n)/2 for relatively low levels of cross-ownership. Cross-ownership schemes require fewer participants than mergers to be advantageous and can always be more profitable than mergers, unless a merger involves more than 88 per cent of industry firms.

Competition in Power Generation: Ex-ante Analysis of Indonesia’s Electricity Market

This research optimises the mix and structure of Generation Companies (GenCos) in the Sumatra power system, Indonesia. Market power, indicating the ability to raise prices profitably above the competitive level, tends to be a significant problem in the aftermath of electricity market restructuring. In the process of regulatory reform and the development of competitive electricity markets, it is desirable and practical to establish an efficient number of competitor GenCos. Simulations of a power system account for multi-plant mergers of GenCos subject to a regulatory measure of the Residual Supply Index and the influence of direct current load flow and the topology of the system. This study simulates the Sumatra power system in order to determine the following: optimal market structure, efficient GenCo generation mix, and the optimal number of competitive GenCos. Further, this study seeks to empirically optimise the electricity generation mix and electricity market structure of the Sumatra power system using DC load flow optimisation, market power index, and multi-plant monopoly analysis. The simulations include generation and transmission constraints to represent network constraints. This research is the first to analyse the Sumatra power system using imperfect (Cournot) competition modelling. Furthermore, this study is the first kind to optimise the mix and structure of the Sumatra generation power market. The guidelines and methodology in this research can be implemented in other countries characterised by a monopoly electricity utility company.

Multi-level optimization framework for resilient distribution system expansion planning with distributed energy resources

A multi-stage optimization framework is proposed in this paper for the resilient electric distribution system expansion planning problem. The Non-utility Distributed Energy Resources (NDERs) can deliver their electricity to the distribution system in normal and external shock conditions. However, the NDERs bidding strategies in external shock conditions are an important issue and they can withhold their electricity generation in a contingent condition. The distribution system must tolerate the external shocks and determine the optimal contribution scenarios of NDERs in these conditions. The proposed algorithm determines the initial topology and system parameters of the planning horizon, at the first stage of optimization. Then, it explores the bidding strategies of NDERs in the second stage. At the third stage, the procedure calculates different market power indices to determine the optimal price of NDERs contributions in its different operational conditions and contracts with the selected NDERs. The problem has different sources of uncertainty that are modelled in the proposed algorithm. To assess the proposed method, 21-bus and 123-bus test systems are considered and the introduced procedure reduced the aggregated investment and operational costs of systems by about 11.82% and 23.74%, respectively, in comparison with the custom expansion planning exercise.

Valuation of Products and Transient Market Power of Firms

Firms utilize non-price strategies to convey the value of their products to consumers. They may also take advantage of rivals market power reduces over time. This empirical study is an attempt to (a) verify whether strategies are developed to reveal the value of products, (b) estimate the transitory market power index, and (c) examine whether the transitory market power reduces over time.

Market Dominance and Market Power

Consider a market where firms sell differentiated but substitutable products. Each firm has some uniqueness for its products but also has non-cooperative rivals. The market power of a firm is determined by the inelasticity of demand for its products as well as it market share. First, an index incorporating both these effects has been proposed. Second, non-price choices of firms help consumers discover the value of different products. A concept has been developed to discover this. A market power index at the firm level has been proposed taking this into account. Third, it was recognized that firms use strategies in excess of this. A measure of this has been proposed. Fourth, aspects of regulation based on the positive market power of firms have been conceptualized. The implementation of these concepts has been illustrated through an example.

Evaluating the market power and coalition formation in double-sided power market: An analytical decomposition approach

In this paper, new indices of the market power are defined to recognize and prioritize the potentials of market power as well as the feasibility of forming a profitable coalition of electricity market players. To this aim, the social welfare optimization problem is formulated and solved in a double-sided power market environment. Then, by forming the Lagrange function, Karush Kuhn Tucker (KKT) conditions are analytically developed. Three major outputs of the above problem including the Locational Marginal Price (LMP), the generation power of each unit and the dispatched elastic load of each Load Service Entity (LSE) are decomposed into basic structural factors. These factors include supply, demand and line congestion effects. Using the coefficients obtained from the structural decomposition, four profit-based market power indices are formulated: (1) profit index of each generator, or GenCo, due to the change of generation units’ bids; (2) profit index of each generator, or GenCo, due to the change of LSEs’ offers; (3) benefit index of each LSE due to the change of generation units’ bids, and (4) benefit index of each LSE due to the change of their offers. The impact of changes in a player’s bidding/offering strategy on its own profits determines the market power of that player. In addition, these changes affect other players' profits. So, the possibility of forming a profitable coalition can be evaluated. The proposed method is simulated on the IEEE 24-bus test system and the proposed indices are calculated and analyzed. Assessment results provide valuable implications for market regulators to monitor the competition level of the power market.

Investigating the effect of competitiveness power in estimating the average weighted price in electricity market

This paper aims at evaluating the impact of power extent on price in the electricity market. The competitiveness extent of electricity market during specific times in a day is considered to achieve this. Then, the effect of competitiveness extent on forecasting preciseness of daily power price is assessed. A price forecasting model based on multi-layer perception via back propagation with the Levenberg-Marquardt mechanism is used. Residual Supply Index (RSI) and other variables that affect prices are used as inputs to the model to evaluate market competitiveness. Results show that using market power indices as an input helps to increase forecasting accuracy. Thus, the competitiveness extent of market power in different daily time periods is a notable variable in price formation. Moreover, market players cannot ignore the explanatory power of market power in price forecasting. In this research, real data of electricity market from 2013 is used and the main source of data is the Grid Management Company in Iran.

Locational marginal price share: a new structural market power index

Market power is known as the ability of units and generation companies (GenCos) to change electricity price profitably. As cleared in the definition, locational marginal price (LMP) is the most important key in market power evaluation. Therefore, the main objective of the paper is to analyze market power of units and GenCos based on their abilities to change electricity price. At the first step, using Karush-Kuhn-Tucker (KKT) conditions of Lagrangian method, LMP is decomposed into four main components. These components indicate the share of each unit at the LMP of each bus. These values are calculated by the proposed analytical method, and cannot be obtained using simulation methods. At the second step, “unit-based LMP_S” index, which indicates the contribution factor of each unit at LMP of each bus, is proposed as a new structural market power index. This index is also used as an effective tool to determine the most profitable coalition between two units. Using that, the market operator can predict highly potential collusions. Moreover, “GenCos-based LMP_S” index is proposed. Using this effective tool, the contribution of each GenCo, which owns multiple units in various buses, at the LMP of each bus is discovered. The proposed market power indices are calculated on the IEEE 24-bus test system and compared with some conventional structural market power indices. Incremental profits of units due to change of unit’s strategies verify the accuracy of proposed method.

Industry Concentration and Wage Inequality: a Directed Technical Change Approach

Despite several theoretical approaches linking rising market power to more income inequality, a theoretical-based empirical quantification of this relationship has not been made. We devised a directed technical change model and characterize this relationship. To test our model, we calculate concentration indexes and relate them with skill-premium using industry data per country for 40 countries from 1995 to 2011. In general, we show a negative and robust relationship between the market power index and wage inequality. Additional evidence shows that results tend to be different for countries with different income levels and for different initial values of skill-premium and market power.

Optimal Demand Response Strategies to Mitigate Oligopolistic Behavior of Generation Companies Using a Multi-Objective Decision Analysis

In this paper, an agent-based model is proposed to improve the electricity market efficiency by using different demand response programs (DRPs). In the proposed model, the strategic self-scheduling of each market player in the electricity market and consequent market interactions are considered by using a game theoretic model powered by a security constrained unit commitment. The tariffs of price-based DRPs and the amount of incentive in the incentive-based DRPs are optimized. Furthermore, a market power index and the operation cost are used to evaluate the market efficiency by using a multi-objective decision-making approach. The results show that different types of DRPs differently affect the oligopolistic behavior of market players, and the potential of market power in power systems can be mitigated by employing the proposed model for DRP optimization. Numerical studies reveal that applying combinational DRPs is more efficient when the regulatory body considers both economic and market power targets.

Estimating bilateral market power of processors and retailers in the U.S. beef industry

AbstractThis paper estimates the full bilateral market power of processors and retailers in the U.S. beef industry. Our full bilateral imperfect competition model allows potential market power exertion from all adjacent upstream and downstream markets of processors and retailers. Empirical results show the presence of market power from processors and retailers in both output and input procurement markets of the U.S. beef industry. Estimates of conjectural elasticities and market power indices suggest that processors’ market power exertion is greater than the exertion of retailers’ market power in the U.S. beef industry. Results of the goodness‐of‐fit statistics indicate that flexible frameworks work better than restrictive models in representing the bilateral market structure. Estimates of market power parameters and market power indices are sensitive to the choice of market structure model as well as functional forms of production function. These findings indicate that any erroneous assumptions on market structure and functional form of production function may result in misleading estimates of market power. [EconLit citations: D43, L11, L13, Q13].