Structural Versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns

Abstract

We try to better understand the comparative advantages of structural and behavioral remedies of deregulation in electricity markets, an eminent policy issue for which the experimental evidence is scant and problematic. Specifically, we investigate theoretically and experimentally the effects on competition of introducing a forward market which the European Commission classifies as a behavioral remedy. We compare this scenario with its best alternative, the structural remedy of adding one more competitor by divestiture. Our study contributes to the literature by introducing more realistic cost configurations, by teasing apart competition effect and asset effect, and by investigating competitor numbers that reflect the market concentration in the European electricity industries. Our experimental data suggest that introducing a forward market has a positive effect on the aggregate supply in markets with two or three major competitors, configurations typical for the newly accessed and the old European Union member states, respectively. Introducing a forward market also increases efficiency.

In contrast to previous findings, our data furthermore suggest that the effect of introducing a forward market is stronger than adding one more competitor. We thus provide evidence that behavioral remedies may be more effective than structural ones. Our data hence suggest that competition authorities are well advised, in line with EU law (European Commission, 2006a, p.11), to focus on introducing, and facilitating the proper functioning of, forward markets rather than on lowering market concentration by divestiture.

Keywords: European electricity markets, economics experiments, remedies, forward markets, competition policy