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FÜR SOZIALFORSCHUNG

CENTER BERLIN

Anette Boom *

under Different Market Structures and with

Endogenously Fixed Demand

SP II 2003 – 01

June 2003

Markets and Political Economy Markt und politische Ökonomie

Competitiveness and Industrial Change Wettbewerbsfähigkeit und industrieller Wandel

Zitierweise/Citation:

Capacity under Different Market Structures and with

Endogenously Fixed Demand, Discussion Paper SP II

2003 – 01, Wissenschaftszentrum Berlin, 2003.

Reichpietschufer 50, 10785 Berlin, Germany, Tel. (030) 2 54 91 – 0

Internet: www.wz-berlin.de

ii

ABSTRACT

Structures and with Endogenously Fixed Demand

by Anette Boom*

firms are compared where the firms invest in their capacity and fix the retail

price while electricity demand is uncertain. A unit price auction determines the

wholesale electricity price when the firms compete. They know the level of

demand when they bid their capacities. Total capacities can be larger or smaller

with a duopoly than with a monopoly. If the two firms co-ordinate on a pareto

dominant equilibrium, then the retail price is always higher and the social

welfare lower in the competitive case, which exists only if capacity costs are not

too high.

Competition

JEL Classification: D42, D43, D44, L11, L12, L13

ZUSAMMENFASSUNG

Marktstrukturen und endogen fixierter Nachfrage

mit denen zweier konkurrierender Unternehmen verglichen. Dabei investieren

die Unternehmen in ihre Kapazität und setzen ihren Einzelhandelspreis, bevor

sich die unsichere Nachfrage realisiert hat. Im Falle konkurrierender Firmen

bestimmt sich der Großhandelspreis in einer nicht-diskriminierenden Auktion.

Die Unternehmen kennen die Nachfragerealisation, wenn sie dort Ihre Gebote

abgeben. Die Gesamtkapazität im Duopol kann sowohl größer als auch kleiner

sein als im Monopol. Falls die zwei Unternehmen sich jedoch auf ein

paretodominantes Gleichgewicht koordinieren, dann ist der Einzelhandelspreis

immer höher und die soziale Wohlfahrt immer niedriger im

Wettbewerbsgleichgewicht als im Monopol, wobei ersteres nur bei relativ

geringen Kapazitätskosten existiert.

* I thank Christian Wey and Christopher Xitco for their helpful comments.

iii

1 Introduction

In many industrialised countries the market for electricity has been liber-

alised. Until the end of the eighties there was almost no competition among

electricity suppliers. The market was characterised by regional monopolies

that were either private enterprises, which had to comply with some kind

of price regulation, or public utilities. The Electricity Pool of England and

Wales and the so-called North Pool of the Scandinavian countries were the

rst attempts to organise a market for electricity and to introduce competi-

tion into the electricity industry. Other countries followed.

Whereas the introduction of competition was rather successful in these two

regions, others, like California and New Zealand, experienced major crises

with an explosion of wholesale prices and black-outs.1 The focus of this paper

is, however, not to gure out what went wrong when California and New

Zealand opened their markets for competition,2 but rather to investigate,

whether the incentives to invest in generating capacity can be suboptimal

under competition compared to a monopoly market.

Why should this be the case? The electricity market like many other markets

is characterised by an uncertain demand. Electricity can, however, usually

not be stored. All competing rms must use the same distribution network,

and the in

ows and out

ows of electricity into this network have to be bal-

anced at each point in time. If the balance cannot be preserved, then the

network collapses and none of the rms can sell electricity anymore. This

creates externalities that might be better internalised by a monopolist than

by competing rms. The monopolist might install larger generating capac-

ities, because he cannot free-ride on the capacity investments of others. In

addition he can realise higher returns on his capacities in the rare cases of

a high demand. He tends, however, to produce less than is socially ecient

and would therefore need and build fewer generating capacities.

There are some indications that competing generators underinvest in their

generating capacity as long as competition is not perfect. Von der Fehr

and Harbord (1997) as well as Castro-Rodriguez et al. (2001) show that

from a social welfare point of view rms would build suboptimal low levels of

generating capacity, if the industry price coincides with their marginal cost of

generating electricity, when the industry's capacities are sucient to satisfy

demand at this price, and with the market clearing price otherwise. By

1 See e.g. The Economist from March 7, 1998, p. 46, and from February 10, 2001, and

for the latest crisis in New Zealand Modern Power Systems from August 2001, p. 11.

2 For analyses of the Californian electricity crisis see, e.g., Joskow (2001), Borenstein

et al. (2001), Borenstein (2002) and Wilson (2002).

1

choosing suboptimal low levels of capacities rms can secure higher revenues

in case of high demand realisations. The ineciency disappears only if the

number of rms approaches innity.3 They also prove that rms invest more

in their generating capacity, if the spot market price exceeds marginal costs

at a xed margin. In addition von der Fehr and Harbord (1997) endogenise

the spot market price of electricity for an inelastic demand that is ex ante

uncertain in the capacity decision stage, and known, when the rms bid for

the possibility to supply electricity in the auction. The auction is a unit price

auction la von der Fehr and Harbord (1993). They conclude that the rms

underinvest in capacity as long as the distribution of the uncertain inelastic

demand is concave, meaning skewed to the lower end of the distribution. But

neither of the two compares the market outcome under competition with the

one generated by a monopoly.

Contrary to von der Fehr and Harbord (1997), we consider consumers with

an elastic demand for electricity. They can, however, not instantaneously

respond to price signals. In the rst stage two rms invest in generating

capacity. Then each rm oers the consumers a contract that guarantees

them a certain retail price and the delivery of electricity as long as deliv-

ery is possible. The consumers accept the contract with the lowest price.

Afterwards nature chooses the level of the demand shock. After observing

demand, rms bid prices in the wholesale market in order to get the right to

deliver the electricity they can generate with their capacity to the network.

The wholesale market is modelled as a unit price auction la von der Fehr

and Harbord (1997) and (1993).4 Although there is a controversial debate

whether a discriminatory auction should be preferred to a uniform auction

design, most of the existing electricity markets are still uniform auctions.5

Since the two rms commit to retail prices before the auction takes place, de-

mand is inelastic in the auction as in von der Fehr and Harbord (1997). It is,

however, not exogenous as in their framework, but endogenously determined

by a competition for consumers in the retail market.

The fact that consumers cannot instantaneously respond to price signals is

due to the imperfect metering technology that is used by most customers.

3 This conrms the result of Borenstein and Holland (2002) who prove e
ciency for

perfectly competitive wholesale markets for electricity with price responsive demand.

4 An alternative approach in order to model unit price auctions has been suggested by

Green and Newbery (1992). It is based on Klemperer and Meyer (1989). They assume

that rms bid dierentiable supply functions, whereas von der Fehr and Harbord (1997)

and (1993) assume that they bid step functions.

5 An exception is the British market where a discriminatory auction has been introduced

with the New Electricity Trading Arrangements in 2001. For a comparison of a uniform

versus a discriminatory versus a Vickrey auction design see Fabra et al. (2002)

2

This technology does not register how much electricity they consume at a

given point in time, and cannot communicate current market prices. In a

companion paper (Boom, 2002) I abstract from this problem and assume that

consumers can instantaneously respond to market prices and can therefore

directly participate in the spot market for electricity. Both papers were

inspired by the proponents of a better metering technology who argue that

such a technology would result in much more elastic demands, reduce peak

demands and improve the performance of liberalised electricity markets (see

Borenstein, 2002 Faruqui et al., 2001). For perfectly competitive electricity

markets with perfectly price responsive demand they can even show that

rms install the socially ecient levels of generating capacities (Borenstein

and Holland, 2002). Most of the existing electricity markets are, however,

not characterised by perfect competition. Therefore we analyse here a market

with an oligopolistic structure.

It turns out that without a sophisticated metering technology the monopolist

might install a smaller or larger capacity (than the two competitors together)

at not too high of a capacity cost. If we focus, however, on subgame per-

fect Nash equilibria that are not pareto dominated, then the two duopoly

rms invest more than the monopolist. The social welfare is, nevertheless,

always higher under a monopoly than in the competitive setting, because the

monopoly price is always lower than the duopoly price. These results con-

trast with those of the companion paper, Boom (2002), where the monopoly

nearly always invests less and where the social welfare is always improved by

competition.

2 The Model

There are two generators of electricity j = A B , and a mass of electricity

consumers that is normalised to one. They suer from demand shocks and

have a quasilinear utility function. Let their surplus function be given by

V (x " r) = U (x ") ; rx = x ; " ; (x ;2 ") ; rx

2

(1)

where x is the consumed electricity, r is the retail price paid per unit for

electricity, and " is the demand shock. It hits all the consumers alike and is

uniformly distributed on the interval 0 1]. The demand for electricity can

be derived from maximising V (x " r) with respect to x and results in

x(r ") = maxf1 + " ; r 0g: (2)

3

Note that the single consumer's demand has no weight in the total demand.

Thus, he cannot in

uence the balance of supply and demand on the grid and

would therefore always accept the lowest retail price oered. If the oered

retail prices are identical, he then chooses each of the two price oers with

equal probability.

The variable costs of generating electricity is assumed to be constant and,

for the sake of simplicity, equal to zero for both rms. Thus the costs of rm

j consist only of the costs of capacity which are assumed to be:

C (kj ) = zkj (3)

where z is a constant unit cost of capacity and kj the generation capacity

installed by rm j . Firms decide on their capacity kj and on their retail

price oer rj before they know the level of demand. When they bid their

capacity in the electricity wholesale market, the demand shock is already

realised and the retail price is already determined. Therefore the market

demand is known for sure and does not respond to changes in the wholesale

price.

The wholesale market price of electricity is determined in a unit price auction

of the type introduced by von der Fehr and Harbord (1997) and (1993). Such

an auction was at the heart of the Electricity Pool in England and Wales

before the reform in 2001, and still is in place in other liberalised markets

like, e.g., the Nord Pool in Scandinavia or the Spanish wholesale market.6.

Firms have to bid a price pj at which they are willing to supply their whole

generating capacity. For the sake of simplicity the rms cannot bid other

quantities.7 The auctioneer must secure the balance of supply and demand

on the grid if possible.8 Therefore he orders the bids according to their prices

and determines the marginal bid that is just necessary to equal supply and

demand. The price of the marginal bid is the spot market price that is payed

to all the generators for each unit that is dispatched on the grid no matter

whether they bid a lower price.9 The capacity of the supplier that has bid a

6 See Bergman et al. (1999).

7 Thus, we do not consider the problem of strategic withholding of capacity in order to

raise the auction price. See Crampes and Creti (2001) for such an analysis.

8 Transmission constraints are not considered here, although they might interact with

constraints in the generating capacity. See Wilson (2002) for insights into this problem

and for the analysis of isolated transmission constraints Borenstein et al. (2000), Joskow

and Tirole (2000) and Lautier (2001)

9 This diers the analysis here from simple Bertrand competition as in Kreps and

Scheinkman (1983) where the undercutting rm receives only its own price per unit sold

even if its capacity is too low to serve all the customers and some of them have to pay the

price of the competitor with the next highest price.

4

price below the marginal price is dispatched completely, whereas the marginal

supplier is only allowed to deliver that amount of electricity necessary to

balance supply and demand. If the supplied capacity at a certain bid price

is insucient to satisfy demand but would be more than sucient to satisfy

demand at the next highest bid price, then the auctioneer sets the price in

between the two bid prices at that level that ensures the balance.10

Since in our framework demand does not respond to changes in the wholesale

price and since the total amount of installed capacities can also not be in

u-

enced by the wholesale price, the auctioneer may also fail to nd a price that

balances supply and demand in the market. Then a black-out occurs. No

rm can sell and deliver electricity, and all the rms realise zero prots. If

total capacities are sucient to satisfy demand, the auctioneer accepts only

price oers that do not exceed the maximum price level p

that ensures zero

prots for the buyer in the auction.

The game proceeds as follows:

1. The two generating rms simultaneously choose their respective capac-

ities kA and kB .

2. The rms simultaneously oer contracts to the consumers that specify

a retail price rA or rB , respectively. The consumers sign the contract

with the lowest price or, sign each contract with probability one half,

if both prices are identical.

3. Nature determines the demand shock ".

4. Both rms bid a price pj for their whole capacity kj in the wholesale

market.

5. The auctioneer determines the market clearing price p, if this is pos-

sible, and which generator is allowed to deliver which amount of elec-

tricity to the grid.

6. If supply and demand cannot be balanced, a black-out occurs. The

consumers are not served and do not pay anything to the generators.

If the balance on the wholesale market can be achieved, the consumers

are served and pay the contracted retail price for each unit of their

demand to the rm with which they signed the contract. The rms

have to pay the wholesale price for each unit of electricity that their

10According to Wilson (2002) we assume an integrated system because participation in

the auction is compulsory if a generating rm wants to sell electricity.

5

contracted consumers required and receive the wholesale price for each

unit of electricity that they were allowed to dispatch on the grid.

It is assumed that the two rms can co-ordinate on a pareto dominant Nash

equilibrium if there are multiple Nash equilibria in one of the stages.

As a benchmark case we analyse how much a monopolist would invest in

generation capacity, if he had to choose his capacity and to x his retail price

r before the uncertainty of demand is resolved. Note that with a monopolist

a wholesale market does not exist. The monopolist's prot function is given

by:

8R 1

>

> maxfr;1 0g r (1 + " ; r )d" ; zk if r 2 ; k

>

>

<Rmax

k;1+r

m (r k) = > fr;1 0g r(1 + " ; r)d" ; zk if maxf0 1 ; kg (4)

> r < 2;k

>

>

:;zk if r < maxf0 1 ; kg:

By dierentiating the monopolist's prot function (4) with respect to r the

optimal retail price for a given generation capacity can be calculated and is

characterised in lemma 1.

Lemma 1 For a given generation capacity k, the monopolist's prot max-

imising retail price is r (k) with

3

r(k) = max 4 2;k :

Proof: See appendix A.

The monopolist sets a price that coincides with the unrestricted monopoly

price of the expected demand, as long as his generation capacity is large

enough (k 45 ) to satisfy even the largest possible demand at this price.

For lower generation capacities (0 k < 45 ) the retail price decreases in the

generation capacity. The monopolist sets a price that ensures no electricity

outages for all possible demand shocks ". Therefore black-outs would never

occur under the scenario considered here.

6

Substituting the optimal price from Lemma 1 into the monopolist's prot

function (4), dierentiating with respect to k, and setting it equal to zero

yields the monopolist's capacity choice, which is given in proposition 1.

Proposition 1 The monopolist chooses the generation capacity

8

>

< 45 ; z2 if z 12

km = >

:0 if z > 21 :

The retail price in equilibrium is

rm = 34 + z2

as long as the investment in generation capacity is positive, i.e. z 21 .

Proof: See appendix A.

The monopolist's investment decreases in the capacity cost z, but is dis-

continuous at z = 21 because even optimal capacity levels and an optimal

retail price would result in negative prots. The retail price increases in the

capacity cost z.

Competing Firms

4.1 The Wholesale Market

If two rms compete, a wholesale market exists. Both rms commit in an

earlier stage to a retail price. In addition the demand shock " can already be

observed by all market participants, therefore total market demand is xed

and known to be:

d(rA rB ") = x (minfrA rB g ") :

The contracted demand of rm j is given by:

8

>

<x1 (rj ") if rj < rh

dj (rj rh ") = > 2 x(rj ") if rj = rh with j h 2 fA B g j 6= h: (5)

:0 if rj > rh

7

In principle we can distinguish two dierent situations. First, total capac-

ity might be smaller than the market demand (d(rj rh ") > kj + kh), in

which case the auctioneer would not nd any auction price that balances

demand and supply and there would be a black-out rms' prots would be

fj (pj ph rj rh ") = 0. Note that the investments in generation capacity are

sunk at this stage. Second, if total capacity is sucient to serve the market

demand (d(rj rh ") kj + kh), then the auction price is:

p if d(rj rh ") > kh

p(pj ph ") = j

ph if d(rj rh ") kh and pj ph (6)

and the auctioneer dispatches the generating capacities of the two rms ac-

cording to their price bids. The quantity of electricity that rm j is allowed

to transmit to the network is given by:

8minfk d(r r ")g

>

> j j h if pj < ph

>

>

< 1 fkj d(rj rh ")g

yj (pj ph ") = > 2 min (7)

>+ 21 maxfd(rj rh ") ; kh 0g if pj = ph

>

>

:maxfd(rj rh ") ; kh 0g if pj > ph:

Thus, rm j 's prot in terms of its own bid price pj and its rival's bid price

ph is

fj (pj ph rj rh ") = rj dj (rj rh ")) + p(pj ph ")(yj (pj ph ") ; dj (rj rh ")):

Note that yj (pj ph ") + yh(pj ph ") = dj (rj rh ") + dh(rj rh ") = d(rj rh ")

must hold. The analysis of the rms' best responses in bid prices is presented

in detail in appendix B and results in the following lemma.

Lemma 2 If both rms have installed enough generation capacity to satisfy

their own contracted demand (kj dj (rj rh) for j = A B ) then the bid prices

and the auction price satisfy pA = pB = p(pA pB ") = 0 and each rm's

prot net of capacity costs in equilibrium is fj (rj rh ") = rj dj (rj rh "))

for j = A B . If the total capacities installed are sucient to satisfy the

market demand (kA + kB d(rj rh ")), but if one rm j , cannot serve

its own contracted demand (kj < dj (rj rh)), then the bid prices satisfy

ph = p

(rj rh ") = p(pj ph ") and pj p^(rj rh ") < p

(rj rh ") with

p

(rj rh ") = d r(jrdj (rrj "r)h ;")k and

j j h j

8

p^(rj rh ") = minfk d(rrj drj (rj")rgh;")d (r r ") :

h j h h j h

Prots are fj (rj rh ") = 0 and fh (rj rh ") = rj dj (rj rh ") + rhdh(rj rh ").

Proof: See appendix B.

Given that both rms can serve their contracted demand, each rm prefers

to undercut its rival during the auction, because no rm wants to become

a net payer. Thus, the Nash equilibrium is a zero auction price and each

rm's prot is limited to the revenues earned from its contracted demand.

Now consider a situation where one rm cannot serve its own contracted

demand, and the other cannot only serve its own contracted demand, but

can also make up for its rival's decit. The decit rm cannot avoid becoming

a net payer during the auction. It can, however, minimize its net demand

position by undercutting. The rm with the generation surplus is always a

net supplier of electricity here. The unique Nash equilibrium in this situation

is characterised by the surplus rm always bidding the maximum price. The

decit rm undercuts suciently, so that the surplus rm has no incentive

to undercut itself. The decit rm cannot realise a positive prot anymore,

whereas the surplus rm can appropriate all the market's rents.

In principle the rms can use three strategies in the retail price competition:

They can undercut their rival and contract the whole, yet uncertain, demand

(see equation (5)). They can oer the same retail price as their rival, thus

contracting half of the market demand, or they can request a higher price

without contracting any demand. Undercutting yields the following expected

prot:

8

> R minf1 kj +rj ;1g r x(r ")d"

< max f0 rj ;1g j j if maxf1 ; kj 0g rj < rh

j (rj rh) = > (8)

:0 if 0 rj < minf1 ; kj rhg:

Firm j can only realise positive prots if the demand shock is, on the one

hand small enough that it can serve its own contracted demand, and, on the

other hand, large enough that the market demand is positive.

If rm j sets the same retail price as its rival, then its expected prot depends

on the relative capacities of the two rms. If the considered rm j has a

smaller capacity than its rival, the structure of its expected prot is the

9

same as in the undercutting case, except that the rm realises only half of

the market demand:

8R minf1 2kj +rh;1g rhx(rh ")

>

>

< maxf0 rh ;1g 2 d" if rh maxf1 ; 2kj

j (rj rh) rj =rh = > 0g (9)

>

:0 if 0 rh < 1 ; 2kj

for kj kh. If rm j has, however, a larger capacity than rm h, it can

appropriate all the rents in the market, if rm h is not able to serve its

contracted demand and if rm j 's surplus of capacity above its contracted

demand makes up for rm h's decit. For kj > kh the expected prot is

8R 1

>

> maxf0 rh ;1g

rh x(rh ") d"

2 if rh 2;

>

> 2kh

>

>

>

>R 2kh+rh;1 rhx(rh ") d"+

>

> maxf0 rh ;1g 2

>

> R minfkh +kj +rh ;1 1g

rhx(rh ")d" if maxf1;

>

>

2kh +rh ;1

2kh 0g < rh

<

j (rj rh) rj =rh = > < 2 ; 2kh (10)

>

>R minfkh+kj +rh;1 1g r x(r ")d"

>

> h h if maxf1 ; kj

>

>

0

;kh 0g < rh

>

> < 1 ; 2kh

>

>

>

>0 if 0 rh <

>

: 1 ; kj ; kh:

If rm j sets a higher retail price than its rival, it has no contracted demand.

It can, however, earn positive revenues when its rival cannot serve its con-

tracted demand at its price rh and rm j 's capacity is large enough to step

in. Then rm j can appropriate the whole rent via the auction. Thus, the

expected prot is:

10

80

>

> if rj > rh 2 ; kh

>

> R minf1 rh;1+kh+kj g r x(r ")d"

>

> if maxf1 ; kh ; kj 0g

< maxf0 rh;1+khg h h rh < minfrj

j (rj rh) = > (11)

> 2 ; khg

>

>

>

> if 0 rh < minfrj

:0 1 ; kh ; kj g:

From the analysis of the rms' prot functions one can derive each rm's best

response in retail prices. This is done in appendix C in detail. If the sum of

both rms generation capacities is rather large, both rms will always want

to undercut each other as in the usual Bertrand competition without any

capacity constraints and strategic considerations concerning the wholesale

market. The resulting Nash equilibrium is rh = rj = 0 and yields zero prots

for both rms.

If the aggregate generation capacity in the market is smaller, one can dis-

tinguish the symmetric case with kA = kB and the asymmetric case with

kA 6= kB . Let us rst consider the asymmetric, but not too asymmetric case

with kj > kh and kh kj2;1 . Then the best response of rm j with the

larger capacity would be characterised by undercutting as long as rh > r^.

It is characterised by rj > rh for maxf0 1 ; 2khg < rh r^, by rj rh

for maxf0 1 ; kh ; kj g rh maxf0 1 ; 2khg, and by indierence for

0 rh < 1 ; kh ; kj , because rm j 's prot is then zero no matter which

retail price it chooses. Firm h with the smaller capacity undercuts if rj > rj0 ,

and chooses the same price as the larger provider j if rj00 rj rj0 . It sets

rh > rj if maxf0 1 ; kj ; khg rj < rj00 and is indierent because of zero

prots for rj = 0 or 0 rj < 1 ; kj ; kh. The critical retail prices r^, rj0 and

rj00 depend on the two rms' capacity levels and are dened in appendix C.

One can show, however, that rj00 < r^ < rj0 always holds. The Nash equilib-

rium is again rh = rj = 0 for kh + kj 1 and rh < 1 ; kh ; kj as well as

rj < 1 ; kh ; kj for kh + kj < 1. In both cases the rms realise zero prots.

Now consider the very asymmetric case with kh < kj2;1 . Firm j can still

serve the whole market for any possible demand shock " at prices where rm

h cannot even serve half of the market when they split the market at rh = rj .

Again rm h undercuts if rj > rj0 , it sets rh = rj , if 1 ; 2kh rj rj0 ,

and it is indierent between undercutting, setting rh = rj and rh > rj , if

2 ; kj rj < 1 ; 2kh, because rm h would realise zero prots anyway.

11

For 0 < rj < 2 ; kj rm h sets rh > rj and can earn positive prots again,

because rm j is no longer able to serve any demand possible. For rj = 0

rm h is indierent between all rh 0, because prots are again zero. Firm

j 's best response does not change in principle. The Nash equilibrium with

rh = rj = 0 still exists, but there are other Nash equilibria where rm

h realises zero and rm j positive prots. In these equilibria rm j sets

rj 2 2 ; kj 1 ; 2kh], where rm h realises zero prots no matter which price

it sets, and rm h undercuts or sets rh > rj if rj = maxf3=4 2 ; kj g. The

results for asymmetric generation capacities of the two rms are summarised

in the following lemma:

Lemma 3 If the two rms di er in their generation capacity (kA 6= kB ),

then there are no Nash equilibria in retail prices where both rms realise

positive prots. The Nash equilibrium in retail prices with rA = rB = 0

always exists. For kA + kB < 1 there are also multiple Nash equilibria with

rA < 1 ; kA ; kB and rB < 1 ; kA ; kB . All these equilibria result in zero

prots for both rms.

For kh < kj2;1 with j h = A B and j 6= h there are, in addition, multiple

Nashn equilibriao with maxfrh 2 ; kj g rj minf1 ; 2kh 3=4g. If kh <

min 1=8 kj2;1 holds, then there is an additional equilibrium with either

rj = 3=4 < rh for kj > 5=4 or rj = 2 ; kj rh for 1 < kj 5=4. The low

capacity rm h realises zero prots in all these additional Nash equilibria and

rm j with the larger capacity:

3

j (r r ) = minfr r g

j h j h 2 ; minfr r g

j h > 0:

Proof: See appendix C .

If the two rms are symmetric in their generation capacities (kA = kB ) and

the capacities are not too large, both rms undercut, as long as the rivals

price exceeds r^. When the rival sets its price at r^, each rm is indierent

between setting a higher price and the same price as the rival. If the rival's

price is below r^, but not smaller than 1 ; kA ; kB , then both rms want to

set a higher price than their rival. If the rival sets a retail price of zero or

a price below 1 ; kA ; kB , then the considered rm is indierent between

undercutting, setting a higher or the same price, because all three options

result in zero prots. Thus, the same Nash equilibrium or equilibria exist(s)

as in the asymmetric case with zero equilibrium prots. In addition there

12

is a Nash equilibrium with rA = rB = r^ > maxf0 1 ; kA ; kB g, where

both rms realise positive prots in equilibrium. Our results concerning

the competition in retail prices with symmetric generation capacities are

summarised in lemma 4.

Lemma 4 If the two rms have the same generation capacity kA = kB = k

then there is always a Nash equilibrium in retail prices with rA = rB = 0.

For k < 1=2 there are also multiple Nash equilibria with rA < 1 ; 2k and

rB <p1 ; 2k. All these equilibria result in zero prots for both rms. For

k < 5=2, there is an additional Nash equilibrium with

8

> ;

p

if 0 k < p12

< 2k

2

rA = rB = > ; p

: 21 3 ; 4k2 ; 1

q5

if p12 k< 2

8 2 pk

>

< k 1; 2 if 0 k < p12

A (rA rB ) = B (rA rB ) = > 81 (1 ; 4k2+ q5

: 3p4k2 ; 1

if p12 k< 2:

In the following section we assume that the two rms are able to co-ordinate

for given capacities on the equilibrium that pareto dominates all the other

possible Nash equilibria in retailp prices. If both rms choose symmetric

capacities with kA = kB = k < 5=2, the pareto dominant Nash equilibrium

results in the retail pricesnrA = roB > 0 given in Lemma 4. With asymmetric

capacities and kh < min kj2;1 81 the pareto dominant Nash equilibrium is

characterised by rj = maxf3=4 2 ; kj g < rh . If the two rms' capacities

satisfy 81 kh < kj2;1 , then the retail prices rh = rj = 1 ; 2kh are set in the

pareto dominant Nash equilibrium.

The rms anticipate the resulting retail prices and the prices on the wholesale

market when they decide on their generation capacities. For a very low

capacity of its rival, a rm can either choose a very large capacity and ensure

itself monopoly revenues, or at least restricted monopoly revenues, or it can

13

choose the same small generation capacity as its rival in order to generate

positive revenues. Firm j 's prot is:

8;zk

>

> j if kj < kh

>

> kj

>

> kj 1 ; p2 ; zkj

2 if kj = kh

>

<

j (kj kh) = >;zkj if kh < kj 2kh + 1 (12)

>

> ;

>

>(2 ; kj ) kj ; 12 ; zkj if 2kh + 1 < kj 54

>

>

: 9 ; zkj if kj > 54

16

for 0 kh < 81 . If the rival's capacity is larger, but still small, the rm can no

longer earn monopoly revenues, but for some small levels of kh, still positive

revenues, if it invests in a very much larger capacity than its rival. Its prot

is:

8;zk

> >

> j if kj < kh

>

>

>

>k 2 1 ; pkj ; zk

j if kj = kh

<j 2

j (kj kh) = > (13)

>;zkj if kh < kj

>

> 2kh + 1

>

>

:max
(1 ; 2kh) ; 1 + 2kh

0 ; zkj if 2kh + 1 < kj

2

for 18 kh < p12 . If the rival chooses intermediate levels of capacities, rm

j 's revenues from investing in the same level of capacity changes. Firm j 's

prot is:

8

>

> ;zkj if kj < kh

>

< q

j (kj kh) = > 18 1 ; 4kj2 + 3 4kj2 ; 1 ; zkj if kj = kh (14)

>

>

:;zkj if kh < kj

q5

for p12 kh < 2 . If the rm's rival chooses very large capacities, then rm

j can no longer earn positive revenues independent of its own capacity level.

14

Firm j 's prot is:

j (kj kh) = ;zkj (15)

q5

for kh > 2 . From these prot functions one can derive each rm's best

response function in generation capacity and the resulting subgame perfect

Nash equilibria. This is done in detail in appendix D. Since both rms are

symmetric, the best response functions for the two rms are also symmetric

and depend on the level of the capacity costs z. For very low levels of the

rivals capacity kh rm j can always monopolize the market by choosing the

same capacity as the monopolist. This is always the best response as long as

the capacity cost is low enough to ensure a positive monopoly prot. If the

rival's capacity increases, then rm j can still monopolize the market, but

must increase its own capacity beyond the optimal monopoly level. Thus,

rm j 's prot from monopolization decreases when the rival' capacity in-

creases. Therefore it is optimal for rm j to reduce its capacity dramatically

at a certain threshold of the rival's capacity kh and to switch either to a

symmetric capacity choice, where both rms share the market, or to zero ca-

pacity when monopolization as well as sharing yields zero prots. Depending

on the level of the capacity costs z, rm j 's best response to higher levels of

the rival's capacity kh is either to install no capacity or to choose the same

capacity and to share the market. For very large capacities of the rival it

is always optimal for rm j to install no capacity. The best responses of

the two rms and the resulting Nash equilibria are depicted in gure 1 for

dierent levels of capacity costs .

From gure 1 it is obvious that there are multiple subgame perfect Nash

equilibria in which the rms choose identical capacities and share the market

at low levels of capacity costs. For intermediate levels of capacity costs there

are still multiple Nash equilibria where the rms choose identical capacities.

In addition there are, however, two equilibria where one of the two rms

chooses the monopoly capacity and the other does not invest. This happens,

if capacity costs are so high that the prots from sharing the market, when

each rm chooses the monopoly level of capacity, is negative. For high levels

of capacity costs the sharing equilibria vanish, because choosing the same

capacity and sharing the market yields always negative prots. Only the two

subgame perfect Nash equilibria, where one rm monopolizes the market,

do still exist. They disappear when the capacity costs are so high that

even a monopolist can not generate positive prots in expectation. Our

results concerning the investments of the two competing rms in generation

15

capacities are summarised in proposition 2, where we use

1

q p

k p 1 ; 1 ; 2z 2 (16)

2

which denes the smallest capacity that ensures zero prot, when both rms

choose the same capacity,

( " r # p 2 )

k

k 2 p1 52 1 ; 4k +83 4k ; 1 ; zk = 0

2

(17)

2

which denes the largest capacity that ensures zero prot, when both rms

choose the same capacity, and

1 k

k~ k 2 0 2 k2 1 ; p ; zk = (18)

1 2

(1 ; 2k) + 2k ; z(2k + 1)

2

which denes the capacity where the necessary capacity to monopolize is as

protable as choosing an identical capacity as one's rival.

Proposition 2 In the subgame perfect Nash equilibria the two competing

rms choose identical generation capacities with

kA = kB = kd 2 k~ k

] if the capacity costs satisfy 0 z < 0:2118:

They choose either identical generation capacities with

kA = kB = kd 2 minfk~ kg k

] or assymmetric capacities with

2 2

where km is dened in proposition 1. The rms choose only asymmetric

capacities with

kj = km and kh = 0 j h = A B j 6= h if p1 z < 12 :

2 2

For z 21 both rms do not invest in generation capacity in equilibrium. The

retail price in the equilibria with identical positive capacities is

82 ; p2k

>

< d if minfk~ kg kd < p12

rd = > p

: 12 3 ; 4(kd)2 ; 1 if p12 kd < k

:

16

Whereas the retail price coincides with the monopoly price rm , given in propo-

sition 1, if the rms choose asymmetric capacities in equilibrium such that

one rm monopolizes the market.

Proof: See Appendix D.

Note that regardless of whether the rms play a competitive equilibrium

with kA = kB 2 minfk~ kg k

] or a monopoly equilibrium, no black-outs

occur independent of the demand shock ".

In the following we focus mainly on subgame perfect equilibria, which are

not dominated by other equilibria. By comparing each rm's prots in the

dierent equilibria described in proposition 2 one can conclude:

Corollary 1 If the capacity cost satises 0 z < 0:2118, then there is a

unique pareto dominant subgame perfect Nash equilibrium where both rms

choose k^, which is dened in (19). For 0:2118 z < 2p1 2 the subgame

perfect equilibria that are not pareto dominated are either characterised by

both rms choosing k^ or by one rm choosing km and the other installing

zero capacities. If 2p1 2 z < 12 holds, then there are two equilibria, which

are not pareto dominated, with one rm choosing km and the other installing

zero capacities. For z 12 there exists only one equilibrium where both rms

do not invest in capacities.

The capacity k^ is the capacity that maximises each rm's prot, if both rms

choose the same level of capacity:

1 ; 4k2 + 3p4k2 ; 1

k^ = argmaxk2 p12 k ] 8 ; zk : (19)

For intermediate levels of capacity costs the equilibrium with kA = kB =

k^ pareto dominates all the other competitive equilibria with kA = kB 2

minfk~ kg k

], but not the two monopoly equilibria with kA = km and kB = 0

and kB = km and kA = 0, because the monopolist in the monopoly equilib-

rium realises always higher prots than each single rm in the competitive

equilibrium. In addition the monopoly equilibria do, as well, not pareto

dominate the competitive equilibrium with kA = kB = k^, because the rm

without any generation capacity has zero prots, whereas it realises positive

prots in the competitive equilibrium with kA = kB = k^. Thus, even if we

consider only pareto dominant subgame perfect Nash equilibria, uniqueness

cannot be achieved.

17

5 Comparison of the Monopoly with the Duopoly

In Figure 2 the total capacities in the monopoly and duopoly cases are de-

lineated. The limits of the total capacities in the competitive equilibria, as

well as the total capacity in the pareto dominant competitive equilibrium and

the total capacity in the monopolistic equilibrium in the duopoly case are

painted in blue. The capacity installed in the monopoly case is characterised

by a red line. It is obvious that together the duopolists might invest more

or less than the monopolist. If we assume, however, that the two rms can

co-ordinate on a subgame perfect equilibrium, which is not pareto dominated

then we arrive at proposition 3.

Proposition 3 If the two rms in the duopoly case can always co-ordinate

on a subgame perfect equilibrium, which is not pareto dominated by an other

one, then the total capacity in the duopoly case exceeds the installed capacity

of a monopolist for capacity costs that satisfy 0 z < 0:2118. It is the same

or larger for 0:2118 z < 2p1 2 , and it is the same for z 2p1 2 .

Proof: The statement follows from 2k^ > km for all 0 z < 2p1 2 .

Proposition 3 seems to conrm common wisdom that oligopolistic rms want

to produce more and would, therefore, also install more capacity. If we

compare, however, the prices in equilibrium for those subgame perfect Nash

equilibria that are not pareto dominated, proposition 4 can then be derived.

Proposition 4 If the two rms in the duopoly case can always co-ordinate

on a subgame perfect equilibrium that is not pareto dominated by an other

equilibrium, then the retail price in the duopoly case exceeds the retail price

of the monopolist for capacity costs that satisfy 0 z < 0:2118. The retail

price is the same or higher for 0:2118 z < 2p1 2 , and it is the same for

z 2p1 2 .

Proof: The statement follows from substituting k^ into rd from proposition

2 and comparing it with rm from proposition 1.

Proposition 4 contradicts the common view that oligopolistic rms want to

produce more and would therefore install larger capacities. Since the two

rms would always set a higher retail price in the competitive equilibrium

than a monopolist, consumers would always consume less than in the monop-

olistic case. Thus, the higher level of installed capacities in the competitive

equilibrium are mainly a consequence of strategic considerations. Larger ca-

pacities and a higher retail price ensure that a rm has a higher chance to

18

serve its own contracted demand. With a small capacity and low retail prices

a rm risks losing all its prots in those cases where it can no longer meet

its contracted demand.

As long as capacities are positive in the market equilibrium, consumers can

always realise their desired consumption level, because black-outs do neither

occur in the duopoly, nor in the monopoly case for any possible demand

shock. Thus, social welfare for both cases is given by:

Z1

W= U (x(r ") ") d" ; zk (20)

0

where U (x(r ") ") is dened in equation (1). The delivery of electricity

is certain in both cases. The higher prices that result in lower consumption

levels and the larger capacities, which only increase the capacity costs without

creating any extra gain from a more certain delivery in the competitive case,

do explain proposition 5.

Proposition 5 If the two rms in the duopoly case can always co-ordinate

on a subgame perfect equilibrium that is not pareto dominated by any other

equilibrium, then the social welfare in the duopoly case is smaller than in the

case with a monopolist for capacity costs that satisfy 0 z < 0:2118. Social

welfare is the same or smaller for 0:2118 z < 2p1 2 , and it is the same for

z 2p1 2 .

Proof: The statement follows from substituting the relevant consumption

levels x(r ") into the social welfare function (20) and from comparing the

social welfare achieved in a monopoly with the one in a competitive equilib-

rium.

If we take into account all possible competitive equilibria in the duopoly

case, retail prices can also be lower than in the monopoly case. It turns

out, however, that social welfare is nearly always lower in the duopoly case

than in the monopoly. The reason is that in those equilibria where the retail

prices are lower, the duopoly capacities are so much higher that capacity

costs outweigh the gains of the consumers from higher consumption levels.

6 Conclusions

Given the multiplicity of subgame perfect Nash equilibria in the competitive

case, it is not easy to derive clear cut conclusions from the analysis here. If

19

we focus on subgame perfect Nash equilibria which are not pareto dominated

by other equilibria, then it is not a problem that competitive rms do not

invest enough in generating capacity. Their investments together usually

exceed the capacity installed by a monopolist. Their retail price is, however,

too high which leads to a lower social welfare than realised in the monopoly

case.

Thus, in the case analysed here where consumers cannot respond directly to

electricity prices, but are guaranteed a certain retail price before an uncertain

demand is realised, competition is bad for social welfare. This contrasts

with the results in a companion paper (Boom, 2002), where consumers can

directly respond to electricity price changes and can therefore take part in the

electricity auction. There competition is always benecial for social welfare.

What drives our results here is the retail price competition where prices

turn out to be relatively high for the installed capacities. A large installed

capacity, as well as a high retail price saves a rm from the bad situation in

which it is not able to satisfy the consumers' demand with whom it signed a

contract. In this situation it would lose all its rents in the wholesale auction.

Therefore it would be interesting to consider the same type of model if in case

of an unsatised demand the loss would be less drastic. This can be expected

if there would be more than one competitor. Another natural extension of

the model considered here is to analyse the eect of a smaller maximum price

in the auction which would punish the competitor, who is not able to meet

his contracted demand, less. The analysis of a model with more competitors

and smaller maximum prices are left to further research.

Appendix

A The Monopolist's Price and Capacity Choice

After integration the monopolist's prot function (4) is

8r

>

> 2 (2 ; r ) ; zk

2 if r > 1

>

<;

m (r k) = >r 23 ; r ; zk if 2 ; k r 1

>

>

: 2r (2r ; r2 + k2 ; 1) ; zk if 0 r < 2 ; k

20

for k 1 and

8 r (2 ; r)2 ; zk

>

> 2 if r 2 ; k

>

>

>

<r k2 ; zk

2

1r <2;k

m(r k) = >

>

> 2 (2r ; r + k ; 1) ; zk

r 2 2 if 1 ; k r < 1

>

>

:;zk if 0 r < 1 ; k

for 0 k < 1. Dierentiating m (r k) with respect to r yields that m (r k)

has a maximum at r(k) = 34 , as long as k 45 , and at r(k) = 2 ; k for

0 k < 54 . Substituting these retail prices into m (r k) yields:

89

>

> 16 ; zk if k 45

>

< 5k 2

m (k) = > 2 ; k ; 1 ; zk if 1 k < 54

>

>

: 21 k2(2 ; k) ; zk if 0 k < 1:

Dierentiating m (k) with respect to k yields; thatpm (k) has

a maximum at

k (z) = 54 ; z2 for 0 z 12 and at k (z) = 16 4 + 16 ; 24z for z > 12 . The

maximised prot, m (k(z)), is continuous and monotonously decreasing in

z. It becomes negative at z = 21 .

Wholesale Market.

Here it is assumed that total capacities are sucient to satisfy the market

demand (kA + kB d(rA rB ")). Then, taking into account (7) each rm's

prot function is given by:

21

8

>

> rj dj (rj rh ") + p(pj ph ")

>

> (minfkj d(rj rh ")g ; dj (rj rh ")) if pj < ph

>

>

>

> rj dj (rj rh ") +

p(pj ph ")

>

< (minfkj d(rj rh2 ")g ; dj (rj rh "))

fj (pj ph rj rh ") = > p(pj ph ")

> + 2 (dh(rj rh ")

>

> ; minfkh d(rj rh ")g) if pj = ph

>

>

>

>

:rj d j((drhj(rrjh r"h) +") p;(pmin

> j ph ")

fkh d(rj rh ")g) if pj > ph:

If both rms are able to serve their own contracted demand, meaning kj

dj (rj rh ") with j = A B , then both rms want to undercut their rival

because by doing so they avoid being a net payer in the auction, but become

a net receiver of payments. Therefore pj = ph = 0 = p(pj ph ") is the unique

Nash equilibrium. Substituting this into fj (pj ph rj rh ") yields fj (rj rh ")

from lemma 2 for kj dj (rj rh ") with j = A B .

Suppose now that only rm h can meet its own contracted demand (kh

dh(rj rh)), whereas rm j cannot (kj < dj (rj rh)). Then rm j is always

a net payer and rm h a net receiver in the auction. Firm j minimizes

its payments by always undercutting rm h. If rm h sets ph > pj , the

auction price would be p(pj ph ") = ph and its optimal price bid would be

ph = p

(rj rh "), given in lemma 2, which ensures zero prots for rm j and

the prot fh(rj rh ") = rj dj (rj rh ") + rhdh(rj rh ") for rm h. The opti-

mal price bid from below would either be indeterminate, if both capacities

were needed to satisfy market demand (kh < d(rj rh ")), or it would be

ph = pj ; with ! 0 if kh d(rj rh "). The auction price would in both

cases satisfy p(pj ph ") = pj and rm h's prot would be fh(pj ph rj rh ") =

rhdh(rj rh ")+ pj (minfkh d(rj rh ")g ; dh(rj rh ")). Firm h prefers under-

cutting rm j 's price as long as pj > p^(rj rh ") holds, and ph = p

(rj rh ")

otherwise. Thus, there are multiple Nash equilibria with pj p^(rj rh ") and

ph = p

(rj rh "), and a unique auction price p(pj ph ") = p

(rj rh "). Substi-

tuting the auction price into the two rms' prot functions yields fj (rj rh ")

and fh(rj rh ") from lemma 2 for kj < dj (rj rh).

22

C The Nash Equilibrium in Retail Prices.

If rm j undercuts its rival's retail price, its best response is then

8

>

<max 2 ; kj 43 if rh > max 2 ; kj 3

4

rj (rh) = >
(21)

:rh ; if 0 rh max 2 ; kj 43

with ! 0 being the smallest unit in which retail prices can be announced.

If rm j sets rj > rh, then it is indierent between all prices that satisfy

this restriction, because its prot, given in (11), does not depend on the level

of rj . Therefore the overall best response is determined by the comparison

of j (rj (rh) rh), derived from (8) and (21), with j (rj rh) rj =rh from (9) or

(10), respectively, and with

j (rj rh) dened in (11).

q 2 that kj > kh. Then the overall best response of rmn j for

Suppose q kj >2koh

5 ; kj is given by rj (rh) = rj (rh) from (21). For min kj 5 ; kj >

kh 0 the overall best response is

8
2 ; k 3

>

>= max j 4 if rh > max 2 ; kj 3

>

>

4

>

>= rh ; if r^ < rh max 2 ; kj 3

>

>

4

>

> if maxf
0 1 ; 2kh

g < rh min fr^

<> rh

rj (rh) > max 2 ; kj 43 (22)

>

>

>

> rh if max
f0 1 ; kj ; kh
g < rh

>

> min 1 ; 2kh max 2 ; kj 34

>

>

> 0

: if 0 rh maxf0 1 ; kj ; khg:

with

8 3;p2(k +k );1 q

>

>

2

h j

2

if kj kh > minf 1 ; kj2 kj ; 1g

>

>

2

<

r^ = >1 ; kh if 0 kh kj ; 1 (23)

>

> q q

>

:2 ; kh2 + kj2 if 0 kh minf 1 ; kj2 kj g:

23

q5

Firm h's best response in retail prices is rh(rj ) = rj (rh) for kj > kh 2 .

q5 n kj ;1 o

For minfkj 2 g > kh max 0 2 rm h's best response in retail prices

is given by

8

>
2 ; k 3

>= max h 4 if rj > max 2 ; kh 3

>

>
r

4

>

>= rj ; if max 2 ; kh 3 > rj0

>

<

4 j

>

>

>

>> rj if rj00 rj > maxf0 1 ; kj ; khg

>

>

: 0 if maxf0 1 ; kj ; khg rj 0

where the critical price rj0 for the rival with the larger capacity is dened as:

( p p

)

3 ; 4k2 ; 1

rj0 = max 2

h 2 ; 2kh (25)

8 q 2 q 2 2 9

00

< 3 ; 4 k j ; 1 5 ; 12 k h + 6 k j ; 2 =

rj = max : 2 3

0 (26)

8 3;p4k ;1 5;p12k +6k ;2 q 1;k

>

>

<max 2

j

2

h

3

j

2 2

if kj kh 2

2

j

:2 ; q2k2 + k2

>

h j if 2

2

j

> kh 0

for p12 < kj 1 and

n p q 2 2o

r00 = max

j 2 ; 2kj 2 ; 2kh + kj (28)

for 0 kj < p12 . It can be shown that rj0 > r^ > rj00 holds for kj > kh

kj ;1 . Thus, r = r = 0 is the only Nash equilibrium in retail prices for

2 h j

24

kj > maxf1 ; kh khg and kh kj2;1 . There are multiple Nash equilibria with

rj < 1 ; kj ; kh and rh < 1 ; kj ; kh for 1 ; kh kj > kh kj2;1 .

For kj2;1 > kh > 0 rm h's best response in retail prices is

8

>

>= 2 ; kh if rj > 2 ; kh

>

>

>

>= rj ; if 2 ; kh rj > rj0

>

>

>

>

<= rj if rj0 rj 1 ; 2kh

rh(rj ) > (29)

>

>0 if 1 ; 2kh > rj 2 ; kj

>

>

>

>> rj if 2 ; kj > rj > 0

>

>

: 0 if rj = 0

where rj0 is dened in (25). Thus, rj 2 2n; kj minof1 ; 2kh 3=4g] and rh rj

is always an equilibrium. For kh < min kj2;1 18 an additional equilibrium

exists with rj = maxf2 ; kj 3=4g < rh.

Now suppose that kA =qkB = k, then each rm has the same best response

in retail prices. If k > 52 , then both rms' best response is given by rj (rh)

q 5 (21) and the only possible Nash equilibrium is rA = rB = 0.

from equation

If 0 k < 2 , then each rm's best response in retail prices is given by:

8
2 ; k 3

>

>= max if rh > max 2 ; k 3

>

>

4

4

r

>

>= rh ; if max 2 ; k 3 > r^

>

<

4 h

>

>

>

>> rh if r^ > rh > maxf0 1 ; 2kg

>

>

: rh if maxf0 1 ; 2kg rh 0

with r^ from (23) with kj = kh = k. Then again there is always a Nash

equilibrium with rA = rB = 0. If k < 1=2, then there are also multiple Nash

equilibria with rA < 1 ; 2k and rB < 1 ; 2k, which result as well in zero

prots for both rms. In addition there is always a Nash equilibrium with

rA = rB = r^ and positive prots for both rms.

25

D The Nash Equilibrium in Generation Capac-

ities

From the maximization of j (kj kh) given in (12), (13), (14) and (15) with

respect to kj one can derive the best response of rm j in its generation

capacity kj . It is given by:

8

>

> 4 ; 2 if 0 kh < 8 ; 4

5 z 1 z

>

>

>

<1 + 2kh if 18 ; z4 kh < k~

kj (kh) = > (31)

>

>kh if k~ kh < k

>

>

:0 if kh k

in (17), by:

85 z

>

> 4 ; 2 if 0 kh < 8 ; 4

1 z

>

> p

>

> 1;2z + 9+4z (z ;5)

>1 + 2kh if ; kh <

1 z

>

<

8 4

p

8

kh < k (32)

>

>

8

>

>kh if k kh < k

>

>

>

:0 if kh k

8

> 5;z

> 4 2 if 0 kh < 81 ; z4

>

< p

1;2z + 9+4z (z ;5)

kj (kh) = >1 + 2kh if ; kh <

1

8

z

4 8 (33)

>

> p9+4z(z;5)

:0 if kh 1;2z+ 8

for p1

2 2 z < and by

1

2

kj (kh) = 0 (34)

for z 21 . Checking for kj (kh(kj )) = kj and kh (kj (kh)) = kh yields the

subgame perfect Nash equilibria described in Proposition 2.

26

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28

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30

Bücher des Forschungsschwerpunkts Markt und politische Ökonomie

Books of the Research Area Markets and Political Economy

Essays on the Contribution of Public Infrastruc- Bankbeziehungen deutscher Unternehmen:

ture to Private: Production and its Political Investitionsverhalten und Risikoanalyse

Economy 2000, Deutscher Universitäts-Verlag

2002, dissertation.de

Christoph Schenk

Hans Mewis Cooperation between Competitors –

Essays on Herd Behavior and Strategic Subcontracting and the Influence of Information,

Delegation Production and Capacity on Market Structure and

2001, Shaker Verlag Competition

1999, Humboldt-Universität zu Berlin

Andreas Moerke http://dochost.rz.hu-berlin.de/dissertationen/schenk-

Organisationslernen über Netzwerke – Die christoph-1999-11-16

personellen Verflechtungen von

Führungsgremien japanischer Horst Albach, Ulrike Görtzen, Rita Zobel (Eds.)

Aktiengesellschaften Information Processing as a Competitive

2001, Deutscher Universitäts-Verlag Advantage of Japanese Firms

1999, edition sigma

Silke Neubauer

Multimarket Contact and Organizational Design Dieter Köster

2001, Deutscher Universitäts-Verlag Wettbewerb in Netzproduktmärkten

1999, Deutscher Universitäts-Verlag

Lars-Hendrik Röller, Christian Wey (Eds.)

Die Soziale Marktwirtschaft in der neuen Christian Wey

Weltwirtschaft, WZB Jahrbuch 2001 Marktorganisation durch Standardisierung: Ein

2001, edition sigma Beitrag zur Neuen Institutionenökonomik des

Marktes

Michael Tröge 1999, edition sigma

Competition in Credit Markets: A Theoretic

Analysis Horst Albach, Meinolf Dierkes, Ariane Berthoin Antal,

2001, Deutscher Universitäts-Verlag Kristina Vaillant (Hg.)

Organisationslernen – institutionelle und

Tobias Miarka kulturelle Dimensionen

Financial Intermediation and Deregulation: WZB-Jahrbuch 1998

A Critical Analysis of Japanese Bank-Firm- 1998, edition sigma

Relationships

2000, Physica-Verlag Lars Bergman, Chris Doyle, Jordi Gual, Lars

Hultkrantz, Damien Neven, Lars-Hendrik Röller,

Rita Zobel Leonard Waverman

Beschäftigungsveränderungen und Europe’s Network Industries: Conflicting

organisationales Lernen in japanischen Priorities - Telecommunications

Industriengesellschaften Monitoring European Deregulation 1

2000, Humboldt-Universität zu Berlin 1998, Centre for Economic Policy Research

http://dochost.rz.hu-berlin.de/dissertationen/zobel-

rita-2000-06-19 Manfred Fleischer

Jos Jansen The Inefficiency Trap

Essays on Incentives in Regulation and Strategy Failure in the

Innovation German Machine Tool Industry

2000, Tilburg University 1997, edition sigma

Innovation, Research Joint Ventures, and Information Gathering and Dissemination

Multiproduct Competition The Contribution of JETRO to

2000, Humboldt-Universität zu Berlin Japanese Competitiveness

http://dochost.rz.hu-berlin.de/dissertationen/siebert- 1997, Deutscher Universitäts-Verlag

ralph-2000-03-23/

The Political Economy of Industrial Policy in

Europe and the Member States

2000, edition sigma

DISCUSSION PAPERS 2002

Kai A. Konrad Extortionary States

Christian Wey

Klaus Schömann von IT-Hochschulabsolventen aus Pakistan –

Empirische Befunde zur Ausgestaltung der

deutschen „Green Card“

Klaus Schömann graduates from Pakistan: Empirical Evidence for

the Design of a German "Green Card"

Firms: Common Values

Firms: Private Values

Harris Schlesinger

Richard C. Stapleton

Econometric Evidence from the OECD Countries

Paul Heidhues Merger Control

Lars-Hendrik Röller Two Faces of Infrastructure Investment

Andreas Stephan

Christian Wey Productivity Enhancing Investments

Emre Ozdenoren

Oligopolistic Markets for Experience Goods

Institutions: Theory and Evidence

the Quality of Care

Kai A. Konrad Sector

Jan Boone ‘Be nice, unless it pays to fight’: A New Theory of FS IV 02 – 18

Price Determination with Implications for

Competition Policy

An Evolutionarily Stable Symbiosis

Kai A. Konrad

Bjørn Sandvik

Odd Rune Straume

Vicki Knoblauch

Wieland Müller

over the Life Cycle: Evidence from the

Semiconductor Industry

Saul Lach Level Panel Data

Eyal Winter

Steffen Huck Strategic Trade Policy and the Home Bias in Firm FS IV 02 – 25

Kai A. Konrad Ownership Structure

Robert Nuscheler Selection in the German Public Health Insurance

System

Robert Nuscheler Regulation

Odd Rune Straume

Movements

Competition

for Non-Durables

Lars-Hendrik Röller Application to Banking

Robin C. Sickles

Damien J. Neven Control: Evidence using Stock Market Data

Lars-Hendrik Röller

Astrid Jung dence from the U.S. Mobile Telecommunications

Industry

DISCUSSION PAPERS 2003

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