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An Empirical Model of Imperfect Dynamic Competition and Application to Hydroelectricity Storage

Olli Kauppi and Matti Liski

September 2008

Olli Kauppi and Matti Liski, September 2008

The Nordic power market presents a unique opportunity for testing the nature and degree of market power in storage behavior due to preciseness of data on market fundamentals determining hydro resource use. We develop an explicit model of dynamic imperfect competition mapping the primitive distributions to market outcomes as a function of the market structure. We estimate the market structure that best explains the main behavioral patterns in pricing, storage, and production in years 2000-05. Exceptional events in the data allow us to identify a pattern for market power. We simulate the expected effiency loss from the pattern and limited scope for social losses. Market power however increases expected reservoir and price levels, and also implies an increase in price risk.

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