Market power and vertical integration in the Spanish electricity market. Working

The Spanish electricity market has two particularities: 1) the high concentration in the hands of two firms that hold around 80 % of the market; 2) the high degree of vertical integration. The same firms buy from and sell electricity into a pool. We model the behavior of firms as competition in supply functions (a la Green and Newberry, 1991) taking into account both the vertical integration and the dynamic features involved in hydroelectrical generation. The different strategic effects we obtain from this model allow us to test the degree of market power of the two main firms through exogenous variations in their downstream demands that have different impact on the pool price. Our results suggest that the two largest firms in the Spanish market exercise market power. ∗contact autho