Research / BFI Working PaperFeb 01, 2019

Does Strategic Ability Affect Efficiency? Evidence from Electricity Markets

Ali Hortaçsu, Fernando Luco, Steven L. Puller, Dongni Zhu

Oligopoly models of price competition predict that strategic firms exercise market power and generate inefficiencies. However, heterogeneity in firms’ strategic ability also generates inefficiencies. We study theTexas electricity market where firms exhibit significant heterogeneity in how they deviate from Nash equilibrium bidding. These deviations, in turn, increase the cost of production. To explain this heterogeneity, we embed a Cognitive Hierarchy model into a structural model of bidding and estimate firms’ strategic sophistication. We find that firm size and manager education affect sophistication. Using the model, we show that mergers that increase sophistication can increase efficiency despite increasing market concentration.

More Research From These Scholars

BFI Working Paper Mar 2, 2020

Random-Coefficients Logit Demand Estimation with Zero-Valued Market Shares

Jean-Pierre Dubé, Ali Hortaçsu, Joonhwi Joo
BFI Working Paper Oct 21, 2019

Design and Analysis of Cluster-Randomized Field Experiments in Panel Data Settings

Bharat K. Chandar, Ali Hortaçsu, John List, Ian Muir, Jeffrey M. Wooldridge
Topics:  Employment & Wages
BFI Working Paper Apr 18, 2019

The Production, Relocation, and Price Effects of US Trade Policy: The Case of Washing Machines

Aaron Flaaen, Ali Hortaçsu, Felix Tintelnot
Topics:  Industrial Organization, Tax & Budget