Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets
UC Berkeley Competition Policy Center Working Paper No. CPC99-08
18 Pages Posted: 28 Feb 2004
Date Written: August 1999
Abstract
Discussions of competition in restructured electricity markets have revealed many misunderstandings about the definition, diagnosis, and implications of market power. In this paper, I attempt to clarify the meaning of market power and show how it can be distinguished from competitive pricing in markets with significant short-run supply constraints. I also address two common myths about market power: (a) that it is present in all markets and (b) that it must be present in order for firms to remain profitable in markets with significant fixed costs. I conclude by arguing that, while a finding of market power in an industry does not necessarily indicate that government intervention is warranted, such analysis is an important part of creating sound public policy.
Keywords: competition, electricity markets
JEL Classification: L4, L5, K2, G3
Suggested Citation: Suggested Citation