Raising prices - How can market power be exercised?

10.6 How can market power be exercised?

10.6.1 Raising prices

Themost straightforwarduse of market power is simply to raise prices.

However,due to therestrictions onmarket behavior,it is dicult to

ex-ploitat leastthe short term useof price raising. However, forlong term

opportunities,justicationwillbefoundforraisingpriceswhenthepriceof

fuelgoesup,unfortunateexchangeratesdevelop,wagesincreaseetc.;allof

which is sometimesforgottenwhen circumstancesbecomemore favorable

again. Thenthere isthe questionof thepricing of hydroelectricity. This

makeschangingpricesconnedmainlytolongtermuseofmarketpower.

When a player increases the price of his production, part of the supply

function will rise and this may cause the order of oers to change. The

systempricewillalwaysincreaseequalorlesstotheplayer'sincrease. The

reasonsforthisare:

•

^Demand^is^exible. ^When^prices^rise,^less^will^be^sold.

•

^To^inuence^prices,^the^producer^must^have^oered^such^a^high^price

to his accepted bids that after the rise, some of his oers will be

higherthantheformersystemprice.

•

^The^oers^which^rise^above^the^old^market^price^may^be^replaced^with

formerlyunacceptedbidsfromotherplayers,whichnowbecomelower

thantheplayer'sbids.

•

^If^the^highest^accepted^bid^is^not^wholly^accepted,^raising^prices^above

the highestbid maythus notincrease prices, asthebids, that rose

abovethehighestacceptedbidwillbereplacedwiththeunaccepted

partof thatbid.

Example10.1 If the demand is entirely inexible anda player owns all

bids on the market that are 5% above or below the system price, a 5%

increase in the price would cause the system price to increase by 5% as

Pricestrategieswillbediscussedfurther inchapter 11.

Todemonstratethepossibilitiesofincreasingprot,testswererunonthe

eectofthe7powerplayers'protwhentheychangethemarkupontheir

home market from 0% to 10%.

Thedata is from Eltra and is for peak

consumptionfrom 11amto12 pmon Tuesday,February11, 2003. When

noplayerisexercisingmarketpower,themarket maybedividedintotwo

priceareas: ontheonehandwesternDenmarkandnorthernGermanywith

pricearoundNOK155perMWhandontheotherhandtheothermarkets

withpricesaroundNOK207.

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure 10.1: Tuesday: Changesin Elsam'sprotwithdierentmarkups

NeitherE2norStatkraftsucceededinchangingthepricesontheirmarket

astheywerenotableto,raiseanyoftheirbidsabovethehighestaccepted

bid, given the limited markup allowed, and are thus not demonstrated.

ElsamandFortum,gures10.1and10.6,couldnotinuencepricestoany

extent,butlostsalestoothers,andthusdidnotprotfromtheiradventure.

Sydkraft,gures10.4and10.5,succeededinchangingthemarketprice,but

theallthebenetwenttootherplayers.However,VattenfallandE.Onwere

successfulin increasingtheir (andother players') prot. See gures10.2,

10.3,10.7and10.8.

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.2:Tuesday: ChangesinVattenfall'sprotwithdierentmarkups

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.3: Tuesday: PriceswhenVattenfall changesitsmarkup

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.4: Tuesday: ChangesinSydkraft'sprotwithdierentmarkups

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.5: Tuesday: Prices whenSydkraftchangesitsmarkup

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.6: Tuesday: Changesin Fortum'sprotwithdierentmarkups

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.7: Tuesday: Changesin E.On'sprotwithdierentmarkups

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.8: Tuesday: Prices whenE.On changesitsmarkup

Accordingtothis data,byincreasingtheirmarkup byca.10%and

there-withthesystempriceintheareabyca.5%,Vattenfallcouldincreasetheir

protbyca. NOK9,500 perhour, whichwouldon ayearly basissumup

toNOK83,220,000.

However,just 33hoursearlier,in theearly morningof Monday, February

10, 2003, wehave a dierent situation. Here there are three price areas

withwesternDenmarkatca.NOK132,easternDenmarkandGermanyat

NOK154andtherestat NOK192perMWh.

All players can, at this time, benet from exercising market power, but

someonlymodestlyandwith onlyasmallmarkup,whileotherscancash

inanextrahandsomeprotwithasubstantialmarkup. TheDanesdowell

during thenight: E2,gures10.9and 10.10,after theysucceedin

break-ing away from the Germans and forming its own price area, and Elsam,

gures10.11and10.12,increasesprotgraduallywithincreasedprices. In

thenorth, priceschange less,although Statkraft, with maximummarkup

in the end, succeeds in leaving the Finns behind, gure 10.14. However,

Statkraft, Vattenfall, Sydkraft and Fortum, gures 10.13 to 10.17, only

seemto benetfrom modest markup astherest ofthe protgoesto the

thusnotdemonstrated.

Figure10.9: Monday: Changesin E2'sprotwithdierentmarkups

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.10: Monday: PriceswhenE2changesitsmarkup

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.11: Monday: ChangesinElsam'sprotwithdierentmarkups

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.12: Monday: Prices whenElsamchangesitsmarkup

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.13:Monday: ChangesinStatkraft'sprotwithdierentmarkups

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.14: Monday: PriceswhenStatkraftchangesitsmarkup

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure 10.15: Monday: Changes in Vattenfall's prot with dierent

markups

1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.1

Figure10.17:Monday: ChangesinFortum'sprotwithdierentmarkups

Onecanseehowdierentmarkupswillmaximizeprotateachtime,which

maycomplicatethepricestrategyofplayersasapricestrategycannotbe

easilyaltered. Itisalsoworthemphasizingin theseexamplesthatwhena

playerchangeshismarkup,newmarkupsmaybeoptimalforotherplayers.

In document IMM YGBY2003ESAESRETR.2003 46 (Sider 82-92)