more competitive electricity marketsidei.fr/sites/default/files/medias/doc/conf/eem/papers... ·...

Silvester van KotenCERGE-EI, Prague

Andreas OrtmannThe University of New South Wales, Sydney

More Competitive Electricity Markets:Structural vs Behavioral Measures

An Experimental Investigation Guided by Theory and Policy Concerns

1. Theoretical Physics

2. Bridge model experimentation

3. Bridge

1. Theory 2. Engineering 3. ImplementationTheoretical Physics Bridge Experimentation Bridge

Theoretical Economics Market ExperimentationExperimental & Computational

Economics

Competitive MarketE.g., Energy Market

Market share of the largest generator in the electricity

market in %

Concentration Generators

1. Behavioral Remedy• Introduce a forward market (Allaz & Vila, JET

1993)

2. Structural Remedy• Add one more competitor by divestiture

Introduction Setup Results

What is the most effective pro-competitive policy?

Behavioral Structural Design

Behavioral:forward market

Introduction Setup Results Behavioral Structural Design

( ) 60p Q Q

A

Spot MarketFriday

Week 1

Demand20

20Q=20+20=40P=20

B

2345Introduction Setup Results Behavioral Structural Design

Forward Market

( ) 60p Q Q

Spot Market

Monday

Friday

Trader

12

12 24

Demand12

12Q=12+12+24=48P=12

A

B

A

B

24

Week 12345Introduction Setup Results Behavioral Structural Design

( ) 60p Q Q

Spot Market

Q=40P=20

23Introduction Setup Results

( ) 60p Q Q

Spot Market+

Forward Market

Q=48P=12



Spot MarketProfit Function

1 2 1 2[ ] 60p q q q q

1 1 2 1 1(60 )( )q q q f

1 2 160 2 0q q f

1 2 12 60q q f

Demand Schedule (Duopoly)

First Order Conditions

iq Total Production (Forward + Spot)

if Production sold in Forward Market( )i iq f Production sold in Spot Market

Price Spot Market Production

Allaz & Villa (JET 1993): Cournot competitionBehavioral Structural Design


1 2 12 60q q f

1 20 & 0f f

1 212 & 12f f

1 215& 0f f

1 2 400

1 2 288

1 450 2 225

Reaction function 15

Nash-Equilibrium

“Backstabbing”

“Forward market boycott”

(“Stackleberg Equilibrium”)

12


• Theory shows that a forward market has a pro-competitive effect (Allaz & Villa, JET, 1993)


2 Firms

3 Firms

4 Firms

Without Forward Market

M2 M3 M4

92.7% 102.7% 102.9%

“2 are few and 4 are many” Huck et al. (JEBO, 2004)


Can we trust this theory?


2 Firms

3 Firms

4 Firms


M2 M3 M4

With Forward Market

M2F M3F –

92.7% 102.7% 102.9%

“2 are few and 4 are many” Huck et al. (JEBO 2004)

80%? 92%?100%? 110%?


Can we trust this theory?


Structural:One more competitor


What is the right comparison?

• By entry?1. Increased competition2. Cheaper aggregate production3. Capital cost of new plants

• By divestiture?1. Only increased competition

Brandts et al (EJ, 2008)Add one more competitor:


• Treatments:• M2, M2F, M3, M3F & M4

• Demand:• As in Brandts et al (2008)

• Costs: Steeply increasing marginal costs• (Newbery, EER 2002).• As in treatment M3 of Brandts et al (2008)

( ) (0,2000 27 )p Q Max Q


Introducing a forward market

Adding one more competitor by divestiture

Experiment comparing

with

Behavioral measure Structural measure


23( ) 2mc q q

2

13( ) 2

q

xc q x

3 22 13 3x x x


M2 M3M2 M3Behavioral Structural DesignIntroduction Setup Results

M2 M3Introduction Setup Results Behavioral Structural Design


M2 M3Behavioral Structural Design


M2 M3

M3 M4

Behavioral Structural Design Predictions


M3 M1

⅓q

⅓q

CM3(⅓q)

CM3(⅓q)

⅓q

CM3(⅓q)

CM1(q) = 3 CM3 (⅓ q)


cost

cost

cost

cost

cost

cost


M3 M1

⅓q

⅓q

CM1(⅓q)

CM1(⅓q)

⅓q

CM1(⅓q)

131 3( ) 3 ( )M MC q C q

11( ) ( )xM MxC q xC q

( ) ( )yxxMy MxyC q C q



2

13( ) 2

q

xc q x

3 22 13 3x x x

3 22 32 3

[ ] [ ]c q c q4 3

3 44 3 [ ] [ ]c q c q

M3

M2 M4


Market with TWO

producers

Market with THREE

producers (original market)

Market with FOUR

producers

Total Production

2*q

Total Costs

2*TC

Total Production

3*q

Total Costs

3*TC

Total Production

4* q

Total Costs

4*TC

0 0 0 0 0 0 2 3 3 6 4 11 4 11 6 30 6 30 8 62 8 62 10 111 9 84 12 180 12 180 12 180

364 112

Adding competition byEntry

(Brandts et al. 2008)

• Ran main sessions in:– October 2009, December 2009, and April 2010

• Ran robustness tests in:– October 2010 and January 2013

• 11 independent obs (groups) for each treatment• Total of 198 subjects

– Prague business school• Average Earning 500CKZ = €20

– PPP: €34– Minimum: 330 CKZ– Maximum: 1080 CKZ

Introduction Setup Results Behavioral Structural Design Predictions

Introduction Setup Results Behavioral Structural Design Predictions


PredictionsBehavioral Structural Design Predictions

2 Firms

3 Firms

4 Firms


M2 M3 M4

With Forward Market

M2F M3F –

40

40/44

43

45

44

3035

4045

5055

1 4 8 12 16 20 24Period

M2_mean M2F_meanM3_mean

M2, M2F, M3

Introduction Setup Outcomes Results Conclusion

3035

4045

5055

1 4 8 12 16 20 24Period


M3, M3F, M4


2 Firms

3 Firms

4 Firms


M2 M3 M4

With Forward Market

M2F M3F –

Averages

Standard errors based on groups (N=11)

39.4

46.1

44.1

49.4

46.1

115%105%

98.7% 102.5%

110.0%

104.9%Confirming meta-analysis Huck et al. (JEBO 2004)

Percentages of the Nash-Equilibrium prediction


8 12 16 20 24Period

M2_mean M2F_meanM3 mean

M2, M2F, M3


M2F

M2

***

39.3

46.3

8 12 16 20 24Period


M2, M2F, M3


M3

M2**

M2F

M2

***44.2

39.3

8 12 16 20 24Period


M2, M2F, M3


M2F

M2

***M3

M2**

M2F

M3ns

44.2

46.3

12 16 20 24Period

M3, M3F, M4


M3F

M3***

44.2

49.6

12 16 20 24Period

M3, M3F, M4


M3F

M3***

M4

M3ns

44.2

46.2

12 16 20 24Period

M3, M3F, M4


M3F

M3***

M4

M3ns

M3F

M4***

46.2

49.6


Introducing a forward market

Adding one more competitor by divestiture

Conclusions of comparison

with

Behavioral measure Structural measure

• Are equally effective in M2• Behavioral measure more effective in M3

– Contrast with Brandts et al (2008) • Are equally effective in M3 if adding one more

competitor is done by entry

Silvester van Koten,CERGE-EI, Prague

Andreas Ortmann, The University of New South Wales, Sydney

Structural versus Behavioral Measures in the Deregulation of Electricity Markets:


Introduction Setup Outcomes Results Conclusion Complication

Observed Forward Market

Predicted

Inexperienced

Experienced

2 firms 85.7 85.6 62.5 4 firms 89.1 99.9 76.8

Ferreira, Kujal & Rassenti, 2009

Are these results robust for experienced players?

M2, M2F, M3

Introduction Setup Outcomes

Experienced

Inexperienced

3035

4045

5055

1 4 8 12 16 20 24Period


3035

4045

5055

Aggr

egat

e Pr

oduc

tion

1 4 8 12 16 20 24Period

run4xM2_mean run4xM2F_meanrun4xM3_mean

Results Conclusion Complication

3035

4045

5055

1 4 8 12 16 20 24Period


3035

4045

5055

Agg

rega

te P

rodu

ctio

n

1 4 8 12 16 20 24Period



Experienced

Inexperienced

M3, M3F, M4



M2 M2F M3 M3F M4 run123 (Inexperienced)

39.3 (1.5)

46.3 (2.0)

44.2 (1.2)

49.6 (0.6)

46.2 (1.0)

run4 (Experienced)

43.1 (1.5)

45.7 (2.4)

42.0 (1.6)

50.9 (0.2)

46.4 (0.9)

Effect Experience

+3.8 -0.6 -2.2 +1.3 +0.2

Significance (two-sided test)

0.08 0.85 0.25 0.03 0.89


M2, M2F, M3


Experienced

Inexperienced

3035

4045

5055

1 4 8 12 16 20 24Period


3035

4045

5055

Aggr

egat

e Pr

oduc

tion

1 4 8 12 16 20 24Period



3035

4045

5055

1 4 8 12 16 20 24Period


3035

4045

5055

Agg

rega

te P

rodu

ctio

n

1 4 8 12 16 20 24Period



Experienced

Inexperienced

M3, M3F, M4


-10

010

2030

% IN

CR

EASE

1 4 8 1 2 16 20 2 4Perio d

Increase in production by Experienced SubjectsIntroduction Setup Outcomes Results Conclusion Complication

Plot & Uhl, SEJ, 1981

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