Vertical Arrangements, Market Structure, and Competition:
An Analysis of Restructured U.S. Electricity Markets

 

Jim Bushnell, Erin T. Mansur, and Celeste Saravia

 
American Economic Review, Volume 98, Issue 1, March 2008, pages 237-266.
AER data file and web appendix, March 2008.
Working Paper, August 2007.
NBER Working Paper 13507, October 2007.
UCEI CSEM Working Paper-126, March 2004, Revised February 2005.
SSRN Yale SOM Working Paper No. ES-40 (abstract number 734463), February 2005.
Previously titled: “Market Structure and Competition: A Cross-Market Analysis of U.S. Electricity Deregulation”

 

Abstract:

 

This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure.