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Capacity Choice In Decentralized Grid-Bound Industries

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  • M. Janssen
  • J. Lingens
  • M. Wobben

Abstract

In grid-bound industries, individual investment in production capacity constitutes a public good in the form of a delivery insurance for all market participants. We analyze the effects of entry (caused e.g. by deregulation) on capacity and output choice in these industries. To this end we employ a Cournot-model with symmetric firms and firm-specific capacity shocks. Our results reveal that the standard welfare-enhancing competition effect of an increasing number of firms, induced by lower prices and higher output quantities, is countervailed by a decrease in delivery insurance and thus by a growing probability of delivery disruptions (blackouts). Beyond a certain number of firms, the latter effect dominates. As a consequence, the socially optimal number of firms is bounded. We calibrate the model on data of the German electric power market to get a notion of this optimal number firms.

Suggested Citation

  • M. Janssen & J. Lingens & M. Wobben, 2013. "Capacity Choice In Decentralized Grid-Bound Industries," Competition and Regulation in Network Industries, Intersentia, vol. 14(1), pages 24-47, March.
    • Handle: RePEc:sen:journl:v:14:i:1:y:2013:p:24-47
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