Sequential markets, market power, and arbitrage

Koichiro Ito, Mar Reguant

Research output: Contribution to journalArticlepeer-review

26 Scopus citations

Abstract

We develop a framework to characterize strategic behavior in sequential markets under imperfect competition and restricted entry in arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using microdata from the Iberian electricity market. We show that the observed price differences and firm behavior are consistent with the model. Finally, we quantify the welfare effects of arbitrage using a structural model. In the presence of market power, we show that full arbitrage is not necessarily welfare- enhancing, reducing consumer costs but increasing deadweight loss.

Original languageEnglish (US)
Pages (from-to)1921-1957
Number of pages37
JournalAmerican Economic Review
Volume106
Issue number7
DOIs
StatePublished - Jul 2016

ASJC Scopus subject areas

  • Economics and Econometrics

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