We thank Rabah Amir, Claude d'Aspremont, Eric van Damme, Jean Gabszewicz, Yves Smeers, and Achim Wambach, as well as seminar participants at Berlin, Brussles, and Cologne for helpful comments and suggestions. Financial support by the Deutsche Forschungsgemeinschaft and the Instituto Valenciano de Investigaciones Económicas (IVIE) is gratefully acknowledged.
Investment Incentives and Electricity Spot Market Competition
Article first published online: 18 OCT 2013
© 2013 Wiley Periodicals, Inc.
Journal of Economics & Management Strategy
Volume 22, Issue 4, pages 832–851, Winter 2013
How to Cite
Grimm, V. and Zoettl, G. (2013), Investment Incentives and Electricity Spot Market Competition. Journal of Economics & Management Strategy, 22: 832–851. doi: 10.1111/jems.12029
- Issue published online: 18 OCT 2013
- Article first published online: 18 OCT 2013
In this paper we analyze investment decisions of strategic firms that anticipate competition on many consecutive spot markets with fluctuating (and possibly uncertain) demand. We study how the degree of spot market competition affects investment incentives and welfare and provide an application of the model to electricity market data. We show that more competitive spot market prices strictly decrease investment incentives of strategic firms. The effect can be severe enough to even offset the beneficial impact of more competitive spot markets on social welfare. Our results obtain with and without free entry. The analysis demonstrates that investment incentives necessarily have to be taken into account for a serious assessment of electricity spot market design.