Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 552: Long-Term Supply Contracts and Collusion in the Electricity Markets

Chloé Le Coq ()
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Chloé Le Coq: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: It has been argued that having a contract market before the spot market enhances competition (Allaz and Vila, 1993). Taking into account the repeated nature of electricity markets, we check the robustness of the argument that the access to contract markets reduces the market power of generators. In particular, we investigate the sensitivity of this result with respect to the finite horizon assumption. This paper proposes a model of the electricity market where firms sign long-term supply contracts with their retailers. Subsequently, the firms repeatedly interact on the spot market. It is shown that contract markets help sustain collusion on the spot market.

Keywords: Contract market; Electricity; Spot Market; Forward; Tacit collusion.

JEL-codes: C72; D43; G13; L13; L94

16 pages, May 28, 2003

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