Abstract:
We try to better understand the comparative advantages of structural and behavioral measures of
deregulation in electricity markets, an eminent policy issue for which the experimental evidence is
scant and problematic. In the present paper we investigate theoretically and experimentally the effects
of the introduction of a forward market on competition in electricity markets. We compare this
scenario with the best alternative, reducing concentration by adding one more competitor by
divestiture. Our work contributes to the literature by introducing more realistic cost configurations,
teasing apart number and asset effect, and studying numbers of competitors that reflect better 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 both the newly accessed and the old European
Union member states. Introducing a forward market also increases efficiency. Our data furthermore
suggest, in contrast to previous findings, that the effects of introducing a forward market is stronger
than adding one more competitor both in markets with two, and particularly three, producers. Our data
thus suggest that the behavioral measure of introducing a forward market is more effective than the
structural measure of adding one more competitor by divestiture. Thus competition authorities should,
in line with EU law, focus on the behavioral measure of introducing, or at least facilitating the
emergence of, forward markets rather than on the structural measure of lowering market concentration
by divestiture.
