Vertical Structure and the Risk of Rent Extraction

Anette Boom, Stefan Buehler

Research output: Contribution to conferencePaperResearchpeer-review

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.
Original languageEnglish
Publication date2018
Number of pages49
Publication statusPublished - 2018
EventThe 45th Annual Conference of the European Association for Research in Industrial Economics. EARIE 2018 - Athens College, Athens, Greece
Duration: 31 Aug 20182 Sep 2018
Conference number: 45
http://www.earie2018.org/

Conference

ConferenceThe 45th Annual Conference of the European Association for Research in Industrial Economics. EARIE 2018
Number45
LocationAthens College
CountryGreece
CityAthens
Period31/08/201802/09/2018
Internet address

Keywords

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

Cite this

Boom, A., & Buehler, S. (2018). Vertical Structure and the Risk of Rent Extraction. Paper presented at The 45th Annual Conference of the European Association for Research in Industrial Economics. EARIE 2018, Athens, Greece.
Boom, Anette ; Buehler, Stefan. / Vertical Structure and the Risk of Rent Extraction. Paper presented at The 45th Annual Conference of the European Association for Research in Industrial Economics. EARIE 2018, Athens, Greece.49 p.
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Boom, A & Buehler, S 2018, 'Vertical Structure and the Risk of Rent Extraction' Paper presented at, Athens, Greece, 31/08/2018 - 02/09/2018, .

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

2018. Paper presented at The 45th Annual Conference of the European Association for Research in Industrial Economics. EARIE 2018, Athens, Greece.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Vertical Structure and the Risk of Rent Extraction

AU - Boom, Anette

AU - Buehler, Stefan

PY - 2018

Y1 - 2018

N2 - 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 showthat 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 separationeliminates the risk of rent extraction and yields lower retail prices.

AB - 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 showthat 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 separationeliminates the risk of rent extraction and yields lower retail prices.

KW - Electricity

KW - Generating capacities

KW - Vertical integration

KW - Monopoly

KW - Competition

KW - Electricity

KW - Generating capacities

KW - Vertical integration

KW - Monopoly

KW - Competition

M3 - Paper

ER -

Boom A, Buehler S. Vertical Structure and the Risk of Rent Extraction. 2018. Paper presented at The 45th Annual Conference of the European Association for Research in Industrial Economics. EARIE 2018, Athens, Greece.