Milking the Cash Cow: Earnings Pressure and Competitive Behavior in the US Electricity Industry

This study examines the effect of earnings pressure on firms’ strategic behavior in output competition. We argue that firms facing earnings pressure will attempt to increase current profits to meet analysts’ forecasts by exploiting market power opportunities in their product markets, even at the risk of encouraging future entry and rival expansion. In commodity industries, this behavior will lead to restricting output in markets where market structure and rival characteristics are more favorable for the exercise of market power. Using data from the US electricity generation industry, our findings show that firms facing earnings pressure tend to be less aggressive in output competition, particularly when they can exploit market power, but that this behavior incites their product-market rivals to produce more aggressively.