Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1113: Market Power and Joint Ownership: Evidence from Nuclear Plants in Sweden

Erik Lundin ()
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Erik Lundin: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden, and Stockholm School of Economics

Abstract: This paper presents an empirical test of the anticompetitive effects of joint ownership, by examining the operation of three nuclear plants in Sweden. Since maintenance is the main conduit explaining the variation in output, I formulate a model of intertemporal choice in which firms choose how to allocate a given amount of maintenance within each year. Using data on production and bidding curves on the day-ahead market, I test the model against data given three behavioral assumptions: Unilateral profit maximization; joint profit maximization; and a social planner. Modeling for joint profit maximization best matches data, indicating that joint ownership has facilitated coordination of maintenance decisions. Terminating the joint ownership and modeling for unilateral profit maximization would lead to a 5 percent decrease in prices and a 6 percent decrease in system production costs. I identify positive supply shocks in the form of inflow to the hydro power reservoirs as important determinants of the incentives to exercise market power. Therefore, the mechanisms discussed in this paper should be of relevance also in other electricity markets where the share of intermittent production is increasing. As a motivation for the structural exercise,I use a difference-in-differences estimator to identify a shift in the allocation of maintenance towards the winter season (when demand and prices are peaking) at the time of the introduction of the joint ownership. This is in line with the results from the structural model, as the ability to influence the price is also higher during the winter season.

Keywords: Joint ownership; Electricity; Nuclear; Maintenance; Collusion

JEL-codes: D22; D43; D44; D92

51 pages, February 29, 2016

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