Events at CERGE-EI

European University Institute, Italy

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

Dr. Silvester van Koten

Authors: Silvester van Koten and Andreas Ortmann

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 of the introduction of a forward market—considered a behavioral remedy by the European Commission—on competition in electricity markets. We compare this scenario with the best alternative, the structural remedy of reducing concentration by adding one more competitor by divestiture. Our study contributes to the literature by introducing more realistic cost configurations, by teasing apart competition 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 both in markets with two, and particularly three, producers. Our data thus provides some evidence for the position that behavioral remedies may be more effective than structural remedies. Competition authorities thus seem well advised, in line with EU law (European Commission, 2006a, p.11), to focus on introducing, or at least facilitating the emergence of, forward markets rather than on lowering market concentration by divestiture.

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