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Analysis of latent market power in the electricity pools of England and Wales



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Regulation Initiative Working Paper Series

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Conventional approaches to assessing market power often refer to market concentration, for which the Herfindahal index is a generally applied measure. However, in looking at competitive markets for electricty generation, based upon marginal time of day bid prices, as in the electricity pool of England and Wales, we find that market concentration is an insufficient measure and can underestimate actual market power. Using a plant-by-plant industry simulation model, extra insights can be gained with respect to the potential for supernormal profits and the circumstances upon which they depend. In particular, the conventional wisdom that an industry structure with a 20% upper bound rules and a target closer to 12% of the potential price-setting plant might be needed to ensure efficient competition.

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Regulation Initiative (closed)

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Regulation Initiative Working Paper Series

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