A Model of Market Power in Electricity Industries Subject to Peak Load Pricing

Abstract

This paper studies the exercise of market power in price-regulated electricity industries under peak-load pricing and merit order dispatching, but where investment decisions are taken by independent generating companies. Within this context, we show that producers can exercise market power by under-investing in base-load capacity, compared to the welfare-maximizing configuration. We also show that when there is free entry with an exogenous fixed entry cost that is later sunk, more intense competition results in higher welfare but fewer firms.