DP4590 Bilateral Market Power and Vertical Integration in the Spanish Electricity Spot Market

Author(s): Kai-Uwe Kühn, Matilde Pinto Machado
Publication Date: September 2004
Keyword(s): bilateral market power, electricity markets, market power test, supply function equilibirum, vertical integration
JEL(s): L13, L41, L94
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4590

The Spanish electricity spot market is highly concentrated both on the seller and the buyer side. Furthermore, unlike electricity spot markets in other deregulated electricity systems, large buyers and sellers are typically vertically integrated. This allows both large net sellers and large net buyers to strategically influence the spot market price. We develop a supply function model of this market to analyse the impact of market power on prices and productive efficiency and use it empiricially to detect such bilateral market power. Our estimates suggest that market power has had little impact on spot market prices but that substantial productive inefficiencies may have arisen from the exercise of bilateral market power.