Activity: Talk or presentation › Lecture and oral contribution
We study how competition and vertical structure determine capacities, retail prices, and welfare in the electricity industry. Analyzing a model in which retailers commit to retail sales before they buy electricity from generators in the wholesale market, we find that welfare is highest if competition is combined with vertical separation. Vertically integrated generators choose excessively high retail prices and capacities to avoid rent extraction in the wholesale market in the event of insufficient capacity. Vertical separation eliminates the risk of rent extraction and induces effective competition in electricity generation and retailing.