Vertical Structure and the Risk of Rent Extraction in the Electricity Industry
Journal
Journal of Economics & Management Strategy
Type
journal article
Date Issued
2020
Author(s)
Abstract
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.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Economic Policy
Refereed
Yes
Publisher
Wiley
Volume
29
Number
1
Start page
210
End page
237
Subject(s)
Eprints ID
259499