Investments in Electricity Generating Capacity under Different Market Structures and with Endogenously Fixed Demand

Investments in Generating Capacities between a monopolist and two competing 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. ∗I thank Christopher Xitco and seminar participants at the Norwegian School of Economics and Business Administration for helpful comments as well as the Social Science Research Center Berlin (WZB) for a productive atmosphere. Financial Support by the German Science Foundation (DFG) through the SFB/TR 15 ”Governance and the Efficiency of Economic Systems” is gratefully acknowledged.