Premium
Vertical structure and the risk of rent extraction in the electricity industry
Author(s) -
Boom Anette,
Buehler Stefan
Publication year - 2019
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12327
Subject(s) - commit , electricity market , vertical integration , electricity retailing , competition (biology) , electricity , market power , welfare , industrial organization , business , retail market , economics , microeconomics , commerce , market economy , marketing , ecology , database , computer science , electrical engineering , biology , monopoly , engineering
This paper studies how competition and vertical structure jointly determine generating capacities, retail prices, and welfare in the electricity industry. Analyzing a model in which demand is uncertain and retailers must commit to retail prices before they buy electricity in the wholesale market, we show that welfare is highest if competition in generation and retailing is combined with vertical separation. Vertically integrated generators choose excessively high retail prices and capacities to avoid rent extraction in the wholesale market when their retail demand exceeds their capacity. Vertical separation eliminates the risk of rent extraction and yields lower retail prices.