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On the Impact of Forward Markets on Investments in Oligopolistic Markets with Reference to Electricity

Author

Listed:
  • Frederic Murphy

    (Fox School of Business and Management, Temple University, Philadelphia, Pennsylvania, 19122)

  • Yves Smeers

    (CORE, Université Catholique de Louvain, Louvain-la-Neuve, Belgium)

Abstract

Allaz and Vila made the seminal contribution that forward contracts mitigate market power on the spot market. This result is widely quoted and elaborated in studies of restructured power markets, where generators can potentially exploit the special characteristics of this industry in order to extract higher prices. Allaz-Vila established their result under the assumption that the production capacities of the players are infinite. We show that the Allaz-Vila result does not hold when capacities are endogenous and constraining generation. Specifically, a forward market can enhance or mitigate market power when capacities are endogenous and demand is unknown at the time of investment. We also show that forward markets do not mitigate market power when capacities are endogenous and demand is known at the time of investment. Our results complement other work that shows that forward markets systematically enhance market power in some symmetric capacity-constrained markets.

Suggested Citation

  • Frederic Murphy & Yves Smeers, 2010. "On the Impact of Forward Markets on Investments in Oligopolistic Markets with Reference to Electricity," Operations Research, INFORMS, vol. 58(3), pages 515-528, June.
    • Handle: RePEc:inm:oropre:v:58:y:2010:i:3:p:515-528
    DOI: 10.1287/opre.1090.0753
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    References listed on IDEAS

    as
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