Research

This article studies peak-load pricing in essential-goods markets such as electricity, transport, and network industries, when consumers have private information about their willingness to pay, belong to observable categories, and a market designer has redistributive objectives. I characterize the optimal mechanism and answer the following: who benefits from capacity expansion, and how redistributive preferences shape the optimal allocation. I derive structural conditions under which the consumers who gain or lose from the mechanism do not coincide with redistributive priorities. This occurs because allocating to one type propagates to others through informational rents and capacity scarcity, and these effects are evaluated at different social values. The same mechanism governs three policy results. First, I characterize the optimal tagging rule for peak-load pricing and show how observable categories should be ranked by capacity allocation and budget contribution. Second, in contrast to the utilitarian case, I establish a new peak-load investment rule in which the distortion from private information and redistribution persists at the optimum. Third, I further discuss the optimal nonlinear tariff that implements the mechanism, showing that spot pricing fails and that optimal block tariffs are generically neither increasing nor decreasing for consumers with strong redistributive priority.

We study equilibrium contract adoption in retail electricity markets in which consumers differ in their willingness to pay over time and can choose between a fixed-price contract (FP) and real-time pricing contract (RTP). Self-selection alters the consumption profile and, in turn, the cost of serving FP customers, creating an adverse-selection channel with endogenous costs. In a competitive retail segment, this channel unravels the FP contract, any private retailer that attracts FP customers is left with a pool that is too costly to serve at break-even. Under a regulated monopoly offering the FP contract, contract choice instead disciplines pricing, the monopoly internalizes consumer sorting to the RTP contract and may cut its price to retain low-cost customers. This pricing response can increase inefficient peak consumption and reduce welfare relative to a benchmark without an RTP contract. We characterize the monopoly’s pricing rule, show how consumer heterogeneity governs the strength of the sorting incentive, and discuss regulatory instruments (two-part tariffs and loss-financing rules) that mitigate the welfare cost of opt-in RTP contracts.

This paper studies the provision of an essential good with time-varying uncertain stochastic demand and capacity-constrained producers such as electricity or medical supplies. Due to price regulation, public good externalities, and market power, investments are typically under-procured by private agents. To restore efficient investment level, we analyze the design of reservation markets where producers can sell their capacity availability before the demand is known. While their direct effect on investment decisions is well known, we focus on indirect effects generated by their implementation, namely how the capacity price is allocated on the demand side and how the realized demand of the essential good is accounted for in the market design. We develop a novel approach to studying the reservation market's interdependencies and the subsequent production and retail markets for the essential good. We provide a sequential analytical model of the three markets and describe how different market design regimes can indirectly affect the equilibria in the production and retail markets in terms of prices, investment level, and welfare. In particular, we demonstrate that the ability of the reservation market to restore the social optimum, or at least to reach a second-best optimum, crucially depends on the different design regimes of the reservation market, on the assumptions of policy interventions, and the various market inefficiencies. The model results and the associated policy implication are discussed first using a general framework and then in reference to electricity markets where capacity reservation is often used to ensure adequate investment to ensure the security of supplies.

In many countries, capacity markets have been put in place to supplement wholesale markets revenues to ensure an adequate generation capacity to maintain security of supply. This paper studies the bidding behavior in those markets and how it can be affected by different capacity product designs. A capacity market allows producers to lock in revenues in advance in exchange for their commitment to being available over a future period on wholesale markets. Producers' participation depends on the opportunity cost of making the investment available. When the commitment is made, the profitability of the plant is uncertain. The canonical framework is based on a net present value model, where the capacity bid is equal to the expected loss on the energy market. However, this does not recognize managerial flexibility and assumes that the plant cannot react to future market conditions. Thus, we propose a novel approach to conceptualize capacity bids using real options theory, where the opportunity cost is represented as an option on the spread that drives the profitability of the plant. First, we define a bid in a one-period capacity market as a European Put Option. Then, we expand to a multi-period setting in which capacity bids can be evaluated as a modified Basket Option. Our model provides new insights on the interplay between the product/commitment duration and on capacity bid. Using the real options approach, the model presents a first attempt to untangle the different drivers of the opportunity cost for providing capacity availability. We analyze the determinants of the option value concomitantly with the length of the procurement and deduce some policy implications for the product's design. Finally, we provide a numerical illustration of this issue using data from the French power system.

Several markets are characterized by incumbents who are forced by the regulatory authorities to make part of their productive investments available to their competitors. In this paper, we study the equilibrium and welfare effect of such regulation where the incumbent who produces in a wholesale market and sells in a retail market is forced to offer parts of its productive capacity to an independent retailer. We assume that an incumbent producer competes with an independent producer via a multi-unit auction wholesale market. Both firms offer a step function and are capacity-constrained. The incumbent firm owns a retailer that competes à la Cournot with an independent retailer. We first describe the effect of vertical integration in that context. Then, we show how allocating part of the production capacity to the independent retailer changes the equilibrium in both markets. Then, we analyze the optimal capacity offered that maximizes welfare.