Abstract
Electricity generation in many countries is dominated by a small number of companies, e.g. EDF in France. This raises concerns that large players may be willing and capable of strategically distorting market results away from competitive outcomes in favour of their profits. This chapter first discusses indicators and analyses of market power, starting with general concepts like the Hirshman-Herfindahl-Index (HHI) but also introducing power-sector specific approaches like the pivotal supplier index and the residual supplier index. Beyond these indicators of market structure, approaches focusing on market conduct and market results are discussed. Turning towards economic models for imperfect competition, standard models are classified and complemented with a small example for the seminal Cournot model. For more advanced concepts like conjectured supply functions and supply function equilibria, the basic ideas and relevant applications are sketched. Also the broad class of so-called mixed complementarity problems and related problem classes such as bi-level models are put into context. Regarding the retail market, a detailed model for consumer switching behaviour is presented which highlights the importance of customer price sensitivity for market outcomes. Finally, the institutional framework for competition oversight and the thereby used concept of workable competition are discussed.
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Notes
- 1.
Note that under certain circumstances, the Bertrand game becomes equivalent to the Cournot game. This is notably true, when the decision-making of the players is described as a two-stage problem: deciding on the capacities at the first stage and then on the sales price in the second stage, cf. Kreps and Scheinkman (1983).
- 2.
In general, the inequality \(a>{C}^{{\prime}}\) holds. The economic interpretation is: \(a\) is the reservation price, i.e. the maximum willingness-to-pay of the consumers. If this reservation price does not exceed the marginal production cost, the quantity sold on the market will be zero. Then, the first-order-condition (9.13) will not hold and instead of an interior optimum the boundary solution \({q}_{i}=0\) will be chosen.
- 3.
Uniform price at least at one point in time and in one given location (price zone), see Chap. 7.
- 4.
- 5.
A straightforward generalisation of the model could be the introduction of individual price sensitivities \({\beta }_{i}\) for the products offered by the different players.
- 6.
It is not possible to give an explicit representation of this reaction function \({p}_{i}^{R}=R\left({p}_{j;j\ne i}\right)\), because this would necessitate to solve the following equation:
$$1-\frac{1}{\beta \left({p}_{i}-{c}_{i}\left({y}_{i}\right)\right)}=\frac{1}{1+{e}^{-{\alpha }_{i}+\beta {p}_{i}}\left({\sum }_{j;j\ne i }{e}^{{\alpha }_{j}-\beta {p}_{j}}\right)}$$The left side thereby is obtained from solving Eq. (9.19) for \({m}_{i},\) and the right side corresponds to a rearrangement of the market share function (9.13), in which \({p}_{i}\) appears only once. As \({p}_{i}\) appears both inside an exponential function and outside, this is a so-called transcendental equation, for which explicit solutions are only available in special cases.
- 7.
For the symmetric case with constant marginal costs, the existence and uniqueness of the market equilibrium are proven by Anderson and de Palma (1992).
- 8.
This may be explained by the historical evolution of the European institutions, which have only gradually evolved from intergovernmental agencies into an executive branch of the European Union. And still today, the European Union has only a limited mandate provided by its member states and not full executive and legislative competences—although these competences are large in the fields of the internal (European) market and competition issues therein.
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Weber, C., Möst, D., Fichtner, W. (2022). Imperfect Competition and Market Power. In: Economics of Power Systems. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-97770-2_9
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