Market Power Of Producers Research Articles

Optimal investment by large consumers in an electricity market with generator market power

The investment decisions of energy-intensive consumers can alter the balance of supply and demand in an electricity market. In particular, they can increase the market power of incumbent generators such that prices may increase as a consequence of their investments. Whilst it is therefore intuitive that such investors will wish to consider their effects on the market, it is a challenging problem analytically and one that has been under-researched. In general, the problem can be manifest in any supply chain where demand-side investments influence endogenous price formation in the intermediate product markets. Theoretically, we show how the presence of producer market power decreases demand-side investments and then, computationally we formulate a quad-level program to model the operational implications for a demand-side investor in more detail. With an innovative reduction in complexity to a bilevel model, an efficient solution algorithm for the optimal investment by a demand-side investor is facilitated. We demonstrate computability on a small scale electricity system and the results confirm the theory.

Antimonopoly regulation method in energy markets based on the Vickrey–Clarke–Groves mechanism

A profit-maximizing producer with market power operating a portfolio of generating units at the centralized two-settlement energy market may submit not only the altered cost but also the distorted values of the technical parameters of its generating units, which enter both the producer's private constraints and the system-wide constraints of the centralized dispatch optimization problem. Prior research on the suitability of the generic Vickrey–Clarke–Groves (VCG) mechanism as an antimonopoly measure against such a producer focused on the distortion of the offered output cost only. We evaluate the applicability of the VCG mechanism against a producer that also misreports the technical parameters of its units. To ensure the applicability of the VCG method in this setting, we identify an additional assumption on the variations of the feasible set induced by alterations of the producer's technical parameters. In the framework of the VCG mechanism, we propose an antimonopoly regulation method based on a regulator estimate of the producer's truthful bid. The error in the estimate affects neither the producer's dominant bid nor its optimal nodal output but manifests itself in the total uplift payment (budget imbalance). This ensures optimality of dispatch and shields the (pre-uplift) market prices from the producer's market power.

Optimal Price-maker Trading Strategy of Wind Power Producer Using Virtual Bidding

This paper proposes a stochastic optimization model for generating the optimal price-maker trading strategy for a wind power producer using virtual bidding, which is a kind of financial tool available in most electricity markets of the United States. In the proposed model, virtual bidding is used to improve the wind power producer's market power in the day-ahead (DA) market by trading at multiple buses, which are not limited to the locations of the wind units. The optimal joint wind power and virtual trading strategy is generated by solving a bi-level nonlinear stochastic optimization model. The upper-level problem maximizes the total expected profit of the wind power and virtual bidding while using the conditional value at risk (CVaR) for risk management. The lower-level problem represents the clearing process of the DA market. By using the Ka-rush-Kuhn-Tucker (KKT) conditions, duality theory, and big- <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">$M$</tex> method, the bi-level nonlinear stochastic model is firstly transferred into an equivalent single-level stochastic mathematical program with the equilibrium constraints (MPEC) model and then a mixed-integer linear programming (MILP) model, which can be solved by existing commercial solvers. To reduce the computational cost of solving the proposed stochastic optimization model for large systems, a method of reducing the number of buses considered for virtual bidding is proposed to simplify the stochastic MPEC model by reducing its decision variables and constraints related to virtual bidding. Case studies are performed to show the effectiveness of the proposed model and the method of reducing the number of buses considered for virtual bidding. The impacts of the transmission limits, wind unit location, risk aversion parameters, wind power volatility, and wind and virtual capacities on the price-maker trading strategy are also studied through case studies.

Estimating the degree of market power in the vegetable market in Japan

AbstractTo adequately capture the market structure of vegetables in Japan, it is necessary to develop an oligopolistic model due to the potential market power of producers vs. retailers. We first estimate the market power between producers and retailers by extending the bilateral oligopoly model. Next, we evaluate the role of the wholesale market and its effect on economic welfare. Our results indicate that the wholesale market benefits both producers and consumers through a reduction in retail margins. This study contributes to the industrial organization literature by developing a bilateral oligopoly model and empirically measuring the wholesale market system in Japan.

Antimonopoly Regulation Method in Energy Markets Based on the Vickrey–Clarke–Groves Mechanism

We evaluate the applicability of the generic Vickrey-Clarke-Groves (VCG) mechanism as an antimonopoly measure against a profit-maximizing producer with market power operating a portfolio of generating units at the centralized two-settlement energy market. The producer may indicate in its bid not only the altered cost function but also the distorted values of the technical parameters of its generating units, which enter the system-wide constraints of the centralized dispatch optimization problem. To ensure the applicability of the VCG method in this setting, we identify an additional assumption on the changes of the feasible set of the centralized dispatch optimization problem induced by variations of the producer's technical parameters. In the framework of the generic VCG mechanism, we propose an antimonopoly regulation method based on a regulator estimate of the producer's truthful bid. If this estimate is exact, the producer's maximum profit coincides with that in the case of the truthful bidding when no antimonopoly measure is applied. If the estimate is not exact, the error affects neither the producer's (weakly) dominant bid nor its optimal nodal output but manifests itself in the total uplift payment. This ensures an efficient allocation in the form of the optimal output/consumption schedule and shields the (pre-uplift) market prices from the producer's market power. We compare the suggested method with the alternative antimonopoly regulation approach based on the replacement of the producer's bid by a bid composed by the regulator.

Utility-scale energy storage in an imperfectly competitive power sector

Interest in sustainability has increased the share of variable renewable energy sources (VRES) in power generation. Energy storage systems' potential to mitigate intermittencies from non-dispatchable VRES has enhanced their appeal. However, the impacts of storage vary based on the owner and market conditions. We examine the policy implications of investments in utility-scale battery storage via a bi-level optimization model. The lower level depicts power system operations, modeled as either perfect competition or Cournot oligopoly to allow for the assessment of producer market power. The upper-level investor is either a welfare-maximizer or a profit-maximizing standalone merchant to reflect either welfare enhancement or arbitrage, respectively. We implement a realistic case study for Western Europe based on all possible size-location storage investment combinations. We find that market competition affects investment sizes, locations, and their profitability more than the investor's objectives. A welfare-maximizer under perfect competition invests the most in storage capacity. Consumers typically gain most from storage investments in all cases, exceeding the gains for the investors. Specifically, our results show that storage investments may either not occur or be located differently than at social optimum, if market power is exerted. Thus, policy makers need to anticipate producer market power when setting regulation.

Game-theoretic model of agents’ interaction on a two-stage market with a random factor

This paper constructs and examines a game-theoretic model of a two-stage market with arbitrageurs. Arbitrageurs are risk-neutral and operate in the conditions of perfect competition. A random factor affects the outcome on the spot market, making the spot price a random value. We determine the optimal strategies for consumers, producers, and arbitrageurs. In addition, we analyze how the market power of producers depends on the parameters of the model. The results demonstrate that introduction of the forward market substantially reduces the market power of producers.

ENDOGENOUS CONSUMER PARTICIPATION AND THE RECYCLING PROBLEM*

We endogenise the extent of consumer participation in the recycling process, and analyse its effect on the ‘recycling problem’. When recycling requires consumers to undertake costly sorting activities to separate scrap from household waste, they will participate only if the net reward from sorting is positive. Consumers' sorting cost is subject to a network effect arising due to social norms. With heterogeneous consumers differing in terms of their sorting cost, the entire output of the recyclable product may not be subsequently available as scrap to the recycling firms. This increases the virgin producer's monopoly power, and may also lead to multiple equilibria if the network effect of sorting is sufficiently large. The latter result suggests a role for the government in influencing equilibrium selection to improve social welfare. Depending on the fraction of consumers that participate in recycling, increased societal pressure on consumers to recycle may decrease consumer participation and increase the virgin producer's market power.

Two‐Sided Platforms: Product Variety and Pricing Structures

This paper provides a new modeling framework to analyze two‐sided platforms connecting producers and consumers. In contrast to the existing literature, indirect network effects are determined endogenously, through consumers' taste for variety and producer competition. Three new aspects of platform pricing structures are derived. First, the optimal platform pricing structure shifts towards extracting more rents from producers relative to consumers when consumers have stronger demand for variety, since producers become less substitutable. With platform competition, consumer preferences for variety, producer market power, and producer economies of scale in multihoming also make platforms' price‐cutting strategies on the consumer side less effective. This second effect on equilibrium pricing structures goes in the opposite direction relative to the first one. Third, variable fees charged to producers can serve to trade off producer innovation incentives against the need to reduce a platform holdup problem.

Future evolution of the liberalised European gas market: Simulation results with a dynamic model

Abstract Strategic behaviour by gas producers is likely to affect future gas prices and investments in the European Union (EU). To analyse this issue, a computational game theoretic model is presented that is based on a recursive-dynamic formulation. This model addresses interactions among demand, supply, pipeline and liquefied natural gas (LNG) transport, storage and investments in the natural gas market over the period 2005–2030. Three market scenarios are formulated to study the impact of producer market power. In addition, tradeoffs among investments in pipelines, LNG liquefaction and regasification facilities, and storage are explored. The model runs indicate that LNG can effectively compete with pipelines in the near future. Further, significant decreases in Cournot prices between 2005 and 2010 indicate that near-term investments in EU gas transport capacity are likely to diminish market power by making markets more accessible.

Pricing forward contracts in power markets by the certainty equivalence principle: Explaining the sign of the market risk premium

In this paper we provide a framework that explains how the market risk premium, defined as the difference between forward prices and spot forecasts, depends on the risk preferences of market players and the interaction between buyers and sellers. In commodities markets this premium is an important indicator of the behavior of buyers and sellers and their views on the market spanning between short-term and long-term horizons. We show that under certain assumptions it is possible to derive explicit solutions that link levels of risk aversion and market power with market prices of risk and the market risk premium. We apply our model to the German electricity market and show that the market risk premium exhibits a term structure which can be explained by the combination of two factors. Firstly, the levels of risk aversion of buyers and sellers, and secondly, how the market power of producers, relative to that of buyers, affects forward prices with different delivery periods.

Cost-benefit analysis of the FDA: The case of the prescription drug user fee acts

The U.S. Food and Drug Administration (FDA) is estimated to regulate markets accounting for about 20% of consumer spending in the U.S. Despite the FDA's strict adherence to evidence-based evaluation of the safety and efficacy of the products it regulates, there exists no generally agreed upon evidence-based methodology to evaluate the agency's own safety and efficacy record. This paper proposes a methodology to evaluate FDA policies in general, and the central speed-safety tradeoff it faces, in particular. We apply this methodology to estimate the welfare effects of a major piece of legislation affecting this tradeoff, the Prescription Drug User Fee Acts (PDUFA). These acts mandated FDA performance goals in reviewing and acting on drug applications within specified time periods, in return for levying fees on drug manufacturers' submissions. Our methodology uses data on the U.S. sales of drugs as well as the FDA review and withdrawal times for those drugs to estimate measures of the private and social surplus associated with the agency in general, and changes in the speed-safety tradeoff induced by PDUFA, in particular. We find that PDUFA raised the private surplus of producers, and thus innovative returns, by about $7 to $11 billion. Depending on assumptions about the market power of producers during patent protection, we find that PDUFA raised consumer welfare between $7 and $20 billion; thus the combined social surplus was raised by $14 to $31 billion. Converting these economic gains into equivalent health benefits, we find that the more rapid access of drugs on the market enabled by PDUFA saved the equivalent of 140,000 to 310,000 life years. Additionally, we estimate an upper bound on the adverse effects of PDUFA based on drugs submitted during PDUFA I/II and subsequently withdrawn for safety reasons, and find that an extreme upper bound of about 56,000 life years were lost. This estimate is an extreme upper bound as it assumes all withdrawals since the inception of PDUFA were due to PDUFA and that there were no patients who benefitted from the withdrawn drugs. We discuss how our general methodology could be used to perform a quantitative and evidence-based evaluation of the desirability of other FDA policies in the future, particularly those affecting the speed-safety tradeoff of the agency.

Pricing Forward Contracts in Power Markets By the Certainty Equivalence Principle: Explaining the Sign of the Market Risk Premium

In this paper we provide a framework that explains how the market risk premium, defined as the difference between forward prices and spot forecasts, depends on the risk preferences of market players and the interaction between buyers and sellers. In commodities markets this remium is an important indicator of the behavior of buyers and sellers and their views on the market spanning between short-term and long-term horizons. We show that under certain assumptions it is possible to derive explicit solutions that link levels of risk aversion and market power with market prices of risk and the market risk premium. We apply our model to the German electricity market and show that the market risk premium exhibits a term structure which can be explained by the combination of two factors. Firstly, the levels of risk aversion of buyers and sellers, and secondly, how the market power of producers, relative to that of buyers, affects forward prices with different delivery periods.

On the stabilizing virtues of imperfect competition

We analyze the stabilizing role of imperfect competition on fluctuations as a result of indeterminacy and endogenous cycles. In this paper, imperfect competition is a source of monopoly profits, because of producer market power. Considering an overlapping generations model with capital accumulation and elastic labor supply, we show that under imperfect competition, the emergence of endogenous fluctuations requires a weaker substitution between production factors than under perfect competition. In this sense, imperfect competition stabilizes fluctuations. However, we find an opposite conclusion concerning the elasticity of labor supply. Indeed, endogenous fluctuations are compatible with a less elastic labor supply under imperfect competition.

Economic Integration, Market Power and Technological Change

We examine a common market which expands by integrating new regions. Capitalists are strategically interdependent through the goods market and they improve their productivity through R&D. Production and R&D employ unionized workers. The purpose of integration is to maximize a weighed average of workers' and capitalists' utilities. The main findings are as follows. Integration benefits capitalists more than workers. If labour unions are strong enough, then the common market can expand indefinitely. Otherwise, there is an upper limit for integration. This is the higher, the higher producer market power or the stronger the capitalists' political influence.

Trade Credit as a Competitiveness Tool; Evidence from Developing Countries

Statistics show that the sale of goods on credit is widespread among firms even when they are financially constrained and thus face relatively high costs in providing trade credit. A possible explanation for this is the use of trade credit as a competitiveness tool. By analyzing both the impact of customer as well as producer market power on a firm’s decision to provide trade credit, we examine whether trade credit is indeed used as a way to lock in customers by firms in developing countries. Using a new dataset containing a large number of firms in 42 developing countries, we find strong evidence that an important driving force behind the decision to provide trade credit is the urge to be competitive. This especially holds for those firms that still have to establish a solid market reputation and for firms located in countries with an underdeveloped banking sector.

Recycling Redux: A Nash–Cournot Approach

We consider an industry characterized by simultaneous competition between the producer of a primary good, and recylers who are Cournot rivals. Two important factors influence the effect of recycling on the equilibrium outcome and on the primary producer's market power: the structure of production costs, and the time lag between primary production and recycling. The presence of the recycling sector may increase the market power of the primary producer, as conventionally measured by the Lerner index. Some of the results raise doubts about the appropriateness of the Lerner measure of market power in certain contexts.

Policy Reforms, Currency Auctions, and Production Choices in Transition Economies

Standard policy instruments such as currency devaluations and price reforms can lead to unusual responses in economies with underdeveloped financial markets and flexible price currency markets. We trace the effects of important policy instruments used within a dual exchange-rate regime, emphasizing that these effects depend on both the market power of producers in domestic industries and the concentration of power within thin currency auctions or interbank markets. The results are especially relevant for the transition economies of the former Soviet Union and Eastern Europe, where auction and interbank currency markets are being established and where some enterprises may exhibit significant local market power.