Vertical Structure and the Risk of Rent Extraction in the Electricity Industry

Anette Boom, Stefan Buehler

Publikation: Working paperForskning

Resumé

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.
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.
SprogEngelsk
Udgivelses stedFrederiksberg
UdgiverCopenhagen Business School, CBS
Antal sider49
StatusUdgivet - 2018
NavnDepartment of Economics. Copenhagen Business School. Working paper
Nummer8-2018

Emneord

  • Electricity
  • Generating capacities
  • Vertical integration
  • Monopoly
  • Competition

Citer dette

Boom, A., & Buehler, S. (2018). Vertical Structure and the Risk of Rent Extraction in the Electricity Industry. Frederiksberg: Copenhagen Business School, CBS. Department of Economics. Copenhagen Business School. Working paper , Nr. 8-2018
Boom, Anette ; Buehler, Stefan. / Vertical Structure and the Risk of Rent Extraction in the Electricity Industry. Frederiksberg : Copenhagen Business School, CBS, 2018. (Department of Economics. Copenhagen Business School. Working paper ; Nr. 8-2018).
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Boom, A & Buehler, S 2018 'Vertical Structure and the Risk of Rent Extraction in the Electricity Industry' Copenhagen Business School, CBS, Frederiksberg.

Vertical Structure and the Risk of Rent Extraction in the Electricity Industry. / Boom, Anette; Buehler, Stefan.

Frederiksberg : Copenhagen Business School, CBS, 2018.

Publikation: Working paperForskning

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KW - Monopoly

KW - Competition

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Boom A, Buehler S. Vertical Structure and the Risk of Rent Extraction in the Electricity Industry. Frederiksberg: Copenhagen Business School, CBS. 2018.