Structural versus Behavioral Measures 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 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.