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

Anette Boom*, Stefan Buehler

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Abstrakt

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.
OriginalsprogEngelsk
TidsskriftJournal of Economics & Management Strategy
Vol/bind29
Udgave nummer1
Sider (fra-til)210-237
Antal sider28
ISSN1058-6407
DOI
StatusUdgivet - jan. 2020

Bibliografisk note

Published online: 30. August 2019

Emneord

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

Citationsformater