PWP-059r Market Power in Electricity Markets: Beyond Concentration Measures

The wave of electricity market restructuring both within the United States and worldwide has brought the issue of horizontal market power to the forefront. Traditionally, estimation and prediction of market power has relied heavily on concentration measures. In this paper, we discuss the weaknesses of concentration measures as a viable measure of market power in the electricity industry, and we propose an alternative method based on market simulations and the use of plant level data. We discuss results from previous studies the authors have performed, and present new results that allow for the detection of threshold demand levels where market power is likely to be a problem. In addition, we analyze the impact of that recent divestitures in the California electricity market will have on estimated market power. We close with a discussion of the policy implications of the results. 1 Borenstein: Haas School of Business, University of California, Berkeley and University of California Energy Institute, 2539 Channing Way, Berkeley, CA 94720-5180, email: [email protected]. Bushnell: University of California Energy Institute, email: [email protected]. Knittel: Department of Economics, University of California, Berkeley, and University of California Energy Institute, email: [email protected].