Market Power and Price Exposure: Learning from Changes in Renewables&Apos; Regulation

53 Pages Posted: 20 May 2020 Last revised: 14 May 2021

See all articles by Imelda .

Imelda .

Universidad Carlos III de Madrid

Natalia Fabra

Universidad Carlos III de Madrid - Departmento de Economia

Date Written: May 2020

Abstract

In many regulatory settings, regulators often debate whether to pay producers at fixed prices or at market-based prices. In this paper, we assess how firms' price exposure affects the degree of market power. We find that fixed prices mitigate market power by directly affecting the dominant firms' incentives to exert market power, while market-based prices do so indirectly by promoting the fringe firms' incentives to engage in arbitrage. To empirically identify these effects, we exploit a natural experiment that took place in the Spanish electricity market, where the regulator switched back and forth from paying renewable energies according to fixed or to market-based prices. Overall, we find that fixed prices were relatively more effective in weakening firms' market power, even though the market-based price regime led to more active price arbitrage.

Suggested Citation

., Imelda and Fabra, Natalia, Market Power and Price Exposure: Learning from Changes in Renewables&Apos; Regulation (May 2020). CEPR Discussion Paper No. DP14729, Available at SSRN: https://ssrn.com/abstract=3603960

Imelda . (Contact Author)

Universidad Carlos III de Madrid

Calle Madrid 126
Getafe, 28903
Spain

Natalia Fabra

Universidad Carlos III de Madrid - Departmento de Economia ( email )

E-28903 Getafe (Madrid)
Spain
+34-91 6249594 (Phone)
+34-91 6249329 (Fax)

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