European Business Schools Librarian's Group

IESE Research Papers,
IESE Business School

No D/812: Divesting power

Giulio Federico () and Angel L. Lopez
Additional contact information
Giulio Federico: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Angel L. Lopez: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN

Abstract: We study alternative market power mitigation measures in a model where a dominant producer faces a competitive fringe with the same cost structure. We characterise the asset divestment by the dominant firm which achieves the greatest reduction in prices. This divestment entails the sale of marginal assets whose cost range encompasses the post-divestment price. A divestment of this type can be several times more effective in reducing prices than divestments of baseload (or low-cost) assets. We also establish that financial contracts (modeled as Virtual Power Plant schemes) are at best equivalent to baseload divestments in terms of consumer welfare.

Keywords: Divestments; Virtual power plants; contracts; market power; electricity; antitrust remedies

JEL-codes: D42; L13; L40; L94

35 pages, August 1, 2009

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