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European Journal of Law and Economics

Van Koten, S. and Ortmann, A., 2013. "Structural versus Behavioral Remedies inthe Deregulation of Electricity Markets: An Experimental Investigation Guidedby Theory and Policy Concerns". European Economic Review 64, 256-265.

We try to better understand the comparative advantages of structural and behavioral remedies of deregulation in electricity markets, an eminent policy issue for which the experimental evidence is scant and problematic. Specifically, we investigate theoretically and experimentally the effects of the introduction of a forward market — considered a behavioral remedy by the European Commission   — on competition in electricity markets. We compare this scenario with the best alternative, the structural remedy of reducing concentration by adding one more competitor by divestiture. Our study contributes to the literature by introducing more realistic cost configurations, by teasing apart competition and asset effect, and by investigating competitor numbers that reflect the market concentration in the European electricity industries. Our experimental data suggest that introducing a forward market has a positive effect on the aggregate supply in markets with two or three major competitors, configurations typical for the newly accessed and the old European Union member states, respectively. Introducing a forward market also increases efficiency. In contrast to previous findings, our data furthermore suggest that the effect of introducing a forward market is stronger than adding one more competitor both in markets with two, and particularly three, producers. Our data thus provides some evidence for the position that behavioral remedies may be more effective than structural remedies. Competition authorities thus seem well advised, in line with EU law (European Commission, 2006a, p.11), to focus on introducing, or at least facilitating the emergence of, forward markets rather than on lowering market concentration by divestiture.

Keywords: economics experiments, electricity markets, market power, forward markets, Cournot competition
JEL classification code: C91, C92, D22, D43, L11, L13, L50, L94, Q41

Earlier version as a CERGE-EI working paper (April 2011) and as a EUI Loyola de Palacio working paper (February 2011).
STATA Data & Statistical tests (password protected - email me at slvstr@gmail.com)

Van Koten, S., 2012. "Merchant Interconnector Projects by Generators in the EU: Effects on Profitability and Allocation of Capacity". Energy Policy 41, 748–758.

When building a cross-border transmission line (a so-called interconnector) as a for-profit (merchant) project, where the regulator has required that capacity allocation be done non-discriminatorily by explicit auction, the identity of the investor can affect the profitability of the interconnector project and, once operational, the resulting allocation of its capacity. Specifically, when the investor is a generator (hereafter the integrated generator) who also can use the interconnector to export its electricity to a distant location, then, once operational, the integrated generator will bid more aggressively in the allocation auctions to increase the auction revenue and thus its profits. As a result, the integrated generator is more likely to win the auction and the capacity is sold for a higher price. This lowers the allocative efficiency of the auction, but it increases the expected ex-ante profitability of the merchant interconnector project. Unaffiliated, independent generators, however, are less likely to win the auction and, in any case, pay a higher price, which dramatically lowers their revenues from exporting electricity over this interconnector.

Keywords: electricity markets, regulation, interconnectors, cross-border electricity transmission, vertical integration, asymmetric auctions, bidding behavior.
JEL classification code: D44, L42, L43, L51, L94, L98, Q40.

Earlier version as a EUI Loyola de Palacio working paper (2011).
Older version: Van Koten, 2006. "Bidding Behavior when One Bidder and the Auctioneer Are Vertically Integrated: Implications for the Partial Deregulation of EU Electricity Markets" [CERGE-EI working paper #313].

Silvester van Koten, 2011. “Legally separated joint ownership of buyer and seller in electricity markets.” Forthcoming in the European Journal of Law and Economics.

This paper addresses the effectiveness of auctions and legal unbundling as regulatory measures to tender a vertically integrated industry more competitive. Specifically, I analyze if implementing auctions and legal unbundling can counter market power in an industry where a Vertically Integrated Corporation (VIC) has a monopoly position in an essential, scarce upstream activity and also owns one of the firms active in the competitive downstream activity. In an earlier paper, Van Koten (2011), I showed that in this configuration the VIC, by having its downstream firm bid more aggressively, can—through increased auction revenue—increase its profit, while disadvantaging downstream competitors and lowering efficiency. Here I analyze the regulatory measure of also legally separating the downstream firm from the VIC. I show that such a measure may only be partially effective; the VIC can formulate a simple compensation scheme that does not violate restrictions typically imposed by legal separation but induces the manager of the VIC-owned downstream firm to bid more aggressively. This increases the profits of the VIC, decreases efficiency, and disadvantages downstream competitors.

Keywords: toehold auctions, bidding behavior, electricity markets, strategic delegation, regulation, 
vertical integration.
JEL classification code: L22, L43, L51, L94, L98.
The Mathematica codes  (in PDF)
the proofs of the propositions in the paper.

Earlier version: Silvester van Koten, 2007. "Legally Separated Joint Ownership of Bidder and Auctioneer: Illustrated by the Partial Deregulation of the EU Electricity Markets." [CERGE-EI Working Paper 346].  

Silvester van Koten & Andreas Ortmann, 2008. CERGE-EI Policy Brief: The Unbundling Regime for Electricity Utilities in the EU: A Case of Legislative and Regulatory Capture?

Silvester van Koten & Andreas Ortmann, 2008. "The Unbundling Regime for Electricity Utilities in the EU: A Case of Legislative and Regulatory Capture?”, Energy Economics. (presented at EEA-ESEM 2007).

Theory and empirics suggest that by curbing competition, incumbent electricity companies which used to be, and here are referred to as, Vertically Integrated Utilities (VIUs), can increase their profitability through combined ownership of generation and transmission and/or distribution networks. Because curbing competition is generally believed to be welfare-reducing, EU law requires unbundling (separation) of the VIU networks. However, the EU allows its member states the choice between incomplete (legal) and complete (ownership) unbundling. There is tantalizing anecdotal evidence that VIUs have tried to influence this choice through questionable means of persuasion. Such means of persuasion should be more readily available in countries with a more corrupted political culture. This paper shows that among the old EU member states, countries which are perceived as more corrupt are indeed more likely to apply weaker forms of unbundling. Somewhat surprisingly, we do not obtain a similar finding for the EU member states that acceded in 2004. We provide a conjecture for this observation.

Keywords: electricity markets; regulation; vertical integration; corruption.
JEL classification code: K49, L43, L51, L94, L98.

Additional analysis
Earlier version 2008 (Dissertation chapter)    
Earlier version 2007 (CERGE-EI working paper #328)

Maartje Raaijmakers, Silvester van Koten, Peter C.M. Molenaar, 1996. "On the validity of simulating stagewise development by means of PDP networks: application of catastrophe analysis and an experimental test of rule-like network performance." Cognitive Science, vol. 20, no.1: 101-136


This article addresses the ability of Parallel Distributed Processing (PDP) networks to generate stagewise cognitive development in accordance with Piaget’s theory of cognitive epigenesis. We carried out a replication study of the simulation experiments by McClelland (1989) and McClelland and Jenkins (1991) in which a PDP network learns to solve balance scale problems. In objective tests motivated from catastrophe theory, o mathematical theory of transitions in epigenetic systems, no evidence for stage transitions in network performance was found. It is concluded that PDP networks lack the ability to recover the positive outcomes of analogous catastrophe analyses of real cognitive developmental data. In an attempt to further characterize the learning behaviour of PDP networks, we carried out ct second simulation study using the discrimination-shift paradigm. The results thus obtained indicate that PDP learning is compatible with the learning of stimulus-response relationships. not with the acquisition of mediating rules such as conceived in (neo-)Piagetian theory. In closing, we speculate about the feasibility of simulating stagewise development with alternative network architectures.

Silvester van Koten,
Oct 30, 2009, 9:24 AM
Silvester van Koten,
Sep 29, 2011, 8:28 AM