The Competitive Effects of Transmission Infrastructure in the Indian Electricity Market∗

The integration of markets may improve efficiency by lowering costs or reducing local market power. India, seeking to reduce electricity shortages, recently set up a market for power trade, in which transmission constraints bind nearly half the time, limiting competition between regions and raising prices by forty percent. I use confidential data on bidding to estimate the costs of electricity supply and simulate market outcomes with more transmission capacity. I find that relaxing transmission constraints would increase market surplus by 19 percent, enough to justify the investment, mostly because strategic firms increase supply in response to a more integrated grid. JEL Codes: O13, L13, L94