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BIASES IN STATIC OLIGOPOLY MODELS? EVIDENCE FROM THE CALIFORNIA ELECTRICITY MARKET

Authors


  • *We thank Severin Borenstein, Jim Bushnell, Erin Mansur, Steve Puller, Victor Stango, Catherine Wolfram, the editor and two anonymous referees for helpful comments. We also thank Severin Borenstein, Jim Bushnell and Frank Wolak for providing us with their marginal cost data. Kim gratefully acknowledges support from the California Energy Commission, while Knittel gratefully acknowledges support from the University of California Energy Institute.

Abstract

Estimating market power is often complicated by a lack of reliable marginal cost data. A number of empirical studies identify industry competition and marginal cost levels by estimating the firms' first order condition within a conjectural variations framework. Few studies, however, have analyzed the accuracy of this technique. In this paper, we use direct measures of marginal cost for the California electricity market to measure the extent to which estimated mark-ups and marginal costs are biased. Our results suggest that the technique poorly estimates mark-ups and the sensitivity of marginal cost to cost shifters.

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