Capacity choice, technology mix and market power

This paper investigates strategic capacity choices in electricity mar-kets comprised of heterogeneous firms. Long term strategic invest-ments are analyzed assuming that the wholesale market is competitive. There are two technologies available to produce electricity; both are ef-ficient and used at a first best optimum. When not all firms can invest in both technologies, there can be over investment in either of these technologies. It is shown that if the number of firms that can invest in a particular technology is limited, the development of competition solely using the other technology can decrease welfare. 1