Market Power and Power Markets

Market power is a prominent issue in the current debate about electricity industry restructuring. Market experiments I conducted with industry subjects via the Internet show the impact of seller concentration, demand-side bidding, and transmission constraints on competition in simulated electricity markets. Realistic modeling of the transmission grid revealed opportunities to exercise market power not found in simpler experimental designs. In particular, increasing the number of sellers in a market did not necessarily reduce market power as standard theory suggests. Rather, locational advantages allowed some players to maintain profits near monopoly levels even when seller concentration was at levels generally considered competitive. The implication is that divestiture of existing local monopolies may not be enough to make electricity markets competitive. I confirm the positive impact of demand-side bidding on competition.