Oligopsony analysis in italian electricity market. preliminary results

In the literature analysis of oligopsony behavior has been usually conducted using ex post market data. It is well known that this approach entails that input supply and demand output slopes cannot be separated from conjectural elasticities. Thus, simultaneity between supply and demand renders difficult to estimate separately the competitive behavior effect from the input supply high elasticity effect (e.g. Bergman and Brännlund, 1995 and Fofana and Shabbar, 2008).

The aim of our paper is to estimate, measure and evaluate the existence of oligopsony market power in the Italian electricity market using a novel approach. We analyze unilateral market power that the 10 largest traders and/or consumers exercise in the Italian wholesale electricity market, assuming an oligopsonistic market structure.

We estimate conjectural elasticities using individual bids submitted to the Italian Market Operator (GME) in the day ahead energy market. In this way we are able to compute the hourly price (arc) elasticity of the ex post residual supply curve, around the equilibrium price that each consumer faces without incurring in the simultaneity problem discussed above.

We use these estimations to measure oligopsony market power  as a result of individual profit maximizing behavior in the market. This is because the inverse of the hourly ex post residual supply elasticity is a measure of the extent to which each consumer is able to exploit its oligopsonistic market power. In this way consumer is able to lower the hourly price below its marginal willingness to pay (WTP) the last megawatt-hour (MWh) purchased in the Italian day ahead energy market.

We compute the average hourly value of the inverse of the consumer residual supply elasticity for all the 8760 hours in each year in the period 2010-2011.

We find that market power of oligopsonistic consumers may be exercised only in some periods of the day in which supply is particularly abundant (this is in line with Wolak, 2001 conjecture). This usually happens in the off-peak hours when supply structure is clearly characterized by increasing marginal costs and therefore the supposed oligopsonist can reap better price.