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Market Organization and Productive Efficiency: Evidence from the Texas Electricity Market

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  • Zhang, Yiyuan

Abstract

This paper examines the impact of market organization on efficiency and social welfare in the electricity market. Wholesale electricity markets exhibit two basic forms of organization: the decentralized bilateral trading market and the centralized auction market. While the centralized market may improve efficiency through information aggregation, it may also reduce efficiency by exacerbating the incentive faced by market participants to exercise market power. Taking advantage of Texas' transition from a bilateral trading market to a centralized auction market, I show that the effect of the former dominates the latter. Using detailed generation data, I find that high-cost generators were displaced by low-cost generators in production. In the nine months following the transition, the generation cost was reduced by $30.7 million, about 0.5% of the total generation cost. Although the centralized market led to private cost saving, it also had an unintended effect on emissions. For moderate estimates of marginal damage values, the increased external costs of emissions completely offset the productive efficiency gain.

Suggested Citation

  • Zhang, Yiyuan, 2016. "Market Organization and Productive Efficiency: Evidence from the Texas Electricity Market," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235715, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea16:235715
    DOI: 10.22004/ag.econ.235715
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    References listed on IDEAS

    as
    1. Steve Cicala, 2022. "Imperfect Markets versus Imperfect Regulation in US Electricity Generation," American Economic Review, American Economic Association, vol. 112(2), pages 409-441, February.
    2. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
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    4. Roth, Alvin E, 1984. "The Evolution of the Labor Market for Medical Interns and Residents: A Case Study in Game Theory," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 991-1016, December.
    5. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter.
    6. Erin T. Mansur, 2008. "Measuring Welfare in Restructured Electricity Markets," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 369-386, May.
    7. Roth, Alvin E, 1991. "A Natural Experiment in the Organization of Entry-Level Labor Markets: Regional Markets for New Physicians and Surgeons in the United Kingdom," American Economic Review, American Economic Association, vol. 81(3), pages 415-440, June.
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    Cited by:

    1. Holmberg, Pär & Tangerås, Thomas & Ahlqvist, Victor, 2018. "Central- versus Self-Dispatch in Electricity Markets," Working Paper Series 1257, Research Institute of Industrial Economics, revised 27 Mar 2019.

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    Keywords

    Environmental Economics and Policy; Industrial Organization; Production Economics; Resource/Energy Economics and Policy;
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