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on Regulation |
| By: | Grubb, Michael D.; Kelly, Darragh; Nieboer, Jeroen; Osborne, Matthew; Shaw, Jonathan |
| Abstract: | At-scale field experiments at major U.K. banks show that automatic enrollment into “just-in-time” text alerts reduces unarranged overdraft and unpaid item charges 17% to 19% and arranged overdraft charges 4% to 8%, implying annual market-wide savings of £170 million to £240 million. Incremental benefits from “early-warning” alerts are statistically insignificant, although economically significant effects are not ruled out. Prior to the experiments, over half of overdrafts could have been avoided by using lower-cost liquidity available in savings and credit card accounts. Alerts help consumers achieve less than half of these potential savings. |
| JEL: | F3 G3 |
| Date: | 2024–12–26 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126884 |
| By: | Abada, I.; Ehrenmann, A.; Smeers, Y. |
| Abstract: | The fundamental principle of marginal pricing in electricity markets has been strongly challenged following the recent European energy crisis. One of the main criticisms is the inability of current markets to drive investments, as spot prices provide only short term information about supply, demand, and costs. This paper revisits the seminal work of Boiteux 1960 in the context of the recent energy crisis to discuss the fundamental assumption of adapted capacity, which underpins the equality between long term and short term marginal costs in the theory of marginal pricing. We argue that capacity is no longer adapted to current economic conditions in Europe. We then leverage techniques of mathematical programming to generalize the results of Boiteux 1960 and propose a market clearing mechanism that preserves the efficiency of current short term marginal pricing to induce optimal plants operations while also providing a long term investment signal when capacities are not necessarily adapted. Through an analysis of captured margins, our proposal, which differs only marginally from the current market clearing, identifies plants that should remain in the current mix and those that are no longer economical. We also discuss possible extensions of our proposal to accommodate capacity markets and price caps. Finally, we implement our models with the French power mix and demonstrate their advantages over the current market clearing mechanism using a realistic case study. |
| Keywords: | Marginal Pricing, Power Markets, Duality, Mathematical Programming |
| JEL: | C61 D40 Q41 |
| Date: | 2024–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2453 |
| By: | Davi-Arderius, D.; Jamasb, T. |
| Abstract: | With the increasing participation of renewable sources, prices of energy commodity in the day-ahead markets have been decreasing and in increasing number of hours to zero or even negative prices. However, in hours with prices and charges equal or below zero, end-users may still pay significant prices for the 'free' electricity, which presents a paradox. This paper analyses the zero-negative price paradox in a highly decarbonized electricity market. We use Seasonal ARIMA methods with hourly data from the Spanish power system (2021-2024). We find that non-energy system costs increase when day-ahead prices decrease. Thus, customers do not receive efficient price signals to adjust their consumption when more renewables are available. In other words, some benefits of lower prices seem to be traded-off with this "price paradox". Similar results can be anticipated in other countries with increasing share of renewables. Future studies of welfare impact of electricity prices should consider how to minimize these increasing non-energy costs. |
| Keywords: | Energy-Only Market, Day-Ahead Electricity Markets, Negative Prices, Renewables, Decarbonization, Ancillary Services |
| JEL: | D47 L10 L22 L50 L94 |
| Date: | 2024–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2451 |
| By: | Martin Kittel; Alexander Roth; Wolf-Peter Schill |
| Abstract: | Coping with prolonged periods of low availability of wind and solar power, also referred to as "Dunkelflaute", emerges as a key challenge for realizing a decarbonized European energy system fully based on renewable energy sources. Here we investigate the role of long-duration electricity storage and geographical balancing in dealing with such variable renewable energy droughts. To this end, we combine renewable availability time series analysis and power sector modeling, using 36 historical weather years. We find that extreme drought events define long-duration storage operation and investment. The most extreme event in Europe occurred in the winter of 1996/97. Assuming policy-relevant interconnection, long-duration storage of 351 TWh or 7% of yearly electricity demand is required to deal with this event. As it affects many countries simultaneously, a storage capacity of 159 TWh or 3% of yearly electricity demand remains required even in the extreme case of unconstrained geographical balancing. Before and during Dunkelflaute events, we find complex interactions of long-duration storage with other flexibility options. Sensitivity analyses illustrate that firm zero-emission generation technologies would only moderately reduce long-duration storage needs. Thus, policymakers and system planners should prepare for a rapid expansion of long-duration storage capacity to safeguard the renewable energy transition in Europe. We further argue that using multiple weather years that include pronounced renewable energy droughts is required for weather-resilient energy system modeling. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.17683 |
| By: | Garrod, Luke; Li, Ruochen; Russo, Antonio; Wilson, Chris M |
| Abstract: | There is limited theoretical understanding of cost pass-through within markets where prices are dispersed. Under a general demand function, we analyse the effects of cost changes in a seminal model of price dispersion, where some consumers are captive to particular sellers while others are not (Varian, 1980). To study pass-through in this mixed-strategy context, we employ a novel approach that links well to the pass-through literature in pure-strategy settings. Following an industry-wide cost increase, we show how the magnitudes of price rises faced by different consumer types, as well as the wider effects on price dispersion, depend upon whether demand is log-concave or log-convex. Furthermore, we examine whether the burden of the cost increase is expected to fall more heavily on captive or non-captive consumers. Finally, we show how our results vary with the level of competition and analyse the relationship between pass-through and demand shocks under price dispersion. |
| Keywords: | Cost pass-through, price dispersion, demand curvature, competition, demand shocks |
| JEL: | D43 D83 L13 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123285 |
| By: | Simshauser, P. |
| Abstract: | Decarbonising Australia's power system requires high market shares of variable renewable energy. An important policy initiative to achieve this is the establishment of Renewable Energy Zones (REZs). As renewable market share increases, spilled energy within REZs is predictable. Spilled energy occurs due to high peak-to-average output ratios of intermittent renewables (being ~3:1), largely inelastic aggregate final electricity demand, and the economic limits of REZ network transfer capacity. In an open access, multi-zonal market setup, an intuitive response by policymakers may be to undertake connection reform (i.e. priority access) and underwrite storage assets to alleviate the worst effects of spilled energy. Prima facie, spilled energy and lines congestion may be reduced, and wind and solar capacity increased, through the deployment of battery storage. However, as model results in this article reveal, priority access makes multi-zonal markets more sensitive to spilled energy, and competitive batteries within a REZ aggravates congestion. Further, early entrant batteries may oversize their MW capacity and crowd-out renewables. All these cases harm welfare within a REZ. Optimally sized coordinated 'portfolio' batteries alleviate congestion because they don't compete for scarce REZ transfer capacity. Rival batteries should be located outside REZs. |
| Keywords: | Renewable Energy Zones, Renewables, Spilled Energy, Marginal Curtailment, Battery Storage |
| JEL: | D52 D53 G12 L94 Q40 |
| Date: | 2024–12–18 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2475 |
| By: | Simshauser, P.; Gilmore, J. |
| Abstract: | The long run task of Australian power system planners is to identify the structural adjustment pathway associated with retiring the National Electricity Market's (NEM) coal fleet. System planning models seek to do this at minimum cost subject to a reliability constraint. This involves the deployment of low-cost intermittent wind and solar resources with a mix of dispatchable, flexible 'firming' assets. Coal's energy-producing role is thus replaced by renewables, and firming duties by short duration batteries, intermediate duration pumped hydro and the last line of defence – gas turbines. As it turns out, the mix of firming assets is crucial. In this article, we examine 12 (anonymised) electricity market model forecasts in the post-coal era and find all have a surprisingly heavy reliance on gas turbines during critical event winter days. Using a dynamic partial equilibrium model of the east Australian gas market, we test the severity of what appear to be demand shocks from an emergent gas turbine fleet. The episodic demand shocks present as intractable, particularly if batteries and pumped hydro plant are 'underweight' within the aggregate generating portfolio. Adequate time is available for policymakers to respond in an orderly manner. |
| Keywords: | Gas Markets, Gas Turbines, Renewables, Firming Capacity |
| JEL: | D52 D53 G12 L94 Q40 |
| Date: | 2024–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2452 |
| By: | Xing, H.; Scott; John |
| Abstract: | Decarbonised future power systems will rely on variable renewable energy (VRE). The variability and intermittence of VRE calls for cost-efficient flexibility providers, such as thermal generators, different energy storage technologies, interconnectors, and excess generation from VRE. This research decomposes the total system cost into cost of flexibility and energy, and constructs an agent-based structure for energy storage operators to price stored energy and a mechanism for all power sources to compete with each other. In the GB power system with the UK's projected VRE and energy storage capacity, the total system cost will be dominated by the cost of providing energy flexibility. Energy storage is more efficient both at reducing total system cost and carbon intensity than additional VRE, which can only reduce carbon intensity, and interconnectors, which can only reduce total system cost by exporting excess generation from VRE. Thermal generators will pay a transfer cost because of their frequent start-up and will still be cost-efficient for seasonal storage. Excess generation from additional VRE reduces carbon intensity but raises the total system cost. To reach the minimum carbon intensity and total system cost, we recommend that the GB power system introduce an additional 25 GW of storage capacity for its projected VRE capacity and introduce mechanical storage technologies which are cost-efficient for managing short-term variability as soon as possible. |
| Date: | 2024–12–18 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2474 |
| By: | Mert Demirer; Michael Rubens |
| Abstract: | In this paper, we provide a theoretical characterization of the welfare effects of buyer and seller power in vertical relations and introduce an empirical approach for quantifying the contributions of each channel to deadweight loss. Our model accommodates both monopsony distortions from buyer power and double-marginalization distortions from seller power. Rather than imposing a specific form of vertical conduct, we allow it to arise endogenously based on model primitives. We show that the relative elasticity of upstream supply and downstream demand is the key determinant of whether buyer or seller power creates distortions. Applying our framework to coal procurement by power plants in Texas, we find that 83% of the distortion comes from the monopoly power of coal mines, with the remainder attributed to the monopsony power of power plants. |
| JEL: | J42 L10 L41 L42 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33371 |
| By: | Jason D. Hartline; Chang Wang; Chenhao Zhang |
| Abstract: | We study the regulation of algorithmic (non-)collusion amongst sellers in dynamic imperfect price competition by auditing their data as introduced by Hartline et al. [2024]. We develop an auditing method that tests whether a seller's pessimistic calibrated regret is low. The pessimistic calibrated regret is the highest calibrated regret of outcomes compatible with the observed data. This method relaxes the previous requirement that a pricing algorithm must use fully-supported price distributions to be auditable. This method is at least as permissive as any auditing method that has a high probability of failing algorithmic outcomes with non-vanishing calibrated regret. Additionally, we strengthen the justification for using vanishing calibrated regret, versus vanishing best-in-hindsight regret, as the non-collusion definition, by showing that even without any side information, the pricing algorithms that only satisfy weaker vanishing best-in-hindsight regret allow an opponent to manipulate them into posting supra-competitive prices. This manipulation cannot be excluded with a non-collusion definition of vanishing best-in-hindsight regret. We motivate and interpret the approach of auditing algorithms from their data as suggesting a per se rule. However, we demonstrate that it is possible for algorithms to pass the audit by pretending to have higher costs than they actually do. For such scenarios, the rule of reason can be applied to bound the range of costs to those that are reasonable for the domain. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.09740 |
| By: | Simon Martin; Hans-Theo Normann; Paul P\"uplichhuisen; Tobias Werner |
| Abstract: | We study the propensity of independent algorithms to collude in repeated Cournot duopoly games. Specifically, we investigate the predictive power of different oligopoly and bargaining solutions regarding the effect of asymmetry between firms. We find that both consumers and firms can benefit from asymmetry. Algorithms produce more competitive outcomes when firms are symmetric, but less when they are very asymmetric. Although the static Nash equilibrium underestimates the effect on total quantity and overestimates the effect on profits, it delivers surprisingly accurate predictions in terms of total welfare. The best description of our results is provided by the equal relative gains solution. In particular, we find algorithms to agree on profits that are on or close to the Pareto frontier for all degrees of asymmetry. Our results suggest that the common belief that symmetric industries are more prone to collusion may no longer hold when algorithms increasingly drive managerial decisions. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.07178 |
| By: | Connor Douglas; Foster Provost; Arun Sundararajan |
| Abstract: | Algorithmic agents are used in a variety of competitive decision settings, notably in making pricing decisions in contexts that range from online retail to residential home rentals. Business managers, algorithm designers, legal scholars, and regulators alike are all starting to consider the ramifications of "algorithmic collusion." We study the emergent behavior of multi-armed bandit machine learning algorithms used in situations where agents are competing, but they have no information about the strategic interaction they are engaged in. Using a general-form repeated Prisoner's Dilemma game, agents engage in online learning with no prior model of game structure and no knowledge of competitors' states or actions (e.g., no observation of competing prices). We show that these context-free bandits, with no knowledge of opponents' choices or outcomes, still will consistently learn collusive behavior - what we call "naive collusion." We primarily study this system through an analytical model and examine perturbations to the model through simulations. Our findings have several notable implications for regulators. First, calls to limit algorithms from conditioning on competitors' prices are insufficient to prevent algorithmic collusion. This is a direct result of collusion arising even in the naive setting. Second, symmetry in algorithms can increase collusion potential. This highlights a new, simple mechanism for "hub-and-spoke" algorithmic collusion. A central distributor need not imbue its algorithm with supra-competitive tendencies for apparent collusion to arise; it can simply arise by using certain (common) machine learning algorithms. Finally, we highlight that collusive outcomes depend starkly on the specific algorithm being used, and we highlight market and algorithmic conditions under which it will be unknown a priori whether collusion occurs. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.16574 |
| By: | Amedeo Piolatto; Florian Schuett |
| Abstract: | We study the design of online platforms that aggregate information and facilitate trans actions. Leading players in the industry (e.g. the Booking Group) hold two types of platforms in their portfolio: revealing platforms that disclose the identity of transaction partners (like Booking.com) and anonymous platforms that do not (like Hotwire.com). Anonymous plat forms offer discounts but lead to inefficient matching between consumers and firms. We develop a model in which horizontally differentiated firms sell to heterogeneous consumers both directly and via a platform that enlarges the pool of consumers they can attract. The platform charges firms for transactions it intermediates and can choose to offer an anonym ous sales channel in addition to a revealing one. We show that offering both sales channels is profitable not only because it allows the platform to implement price discrimination, as suggested by the literature on opaque selling, but also because it improves rent extraction. The anonymous channel breaks the link between the price on the revealing channel and the firms’ outside option; moreover, it can reduce double marginalisation. The welfare impact of the anonymous channel is ambiguous: while it sometimes leads to market expansion, it also causes inefficiently high transport costs. |
| Date: | 2023–11 |
| URL: | https://d.repec.org/n?u=RePEc:ete:ceswps:746858 |
| By: | Peter Levell (Institute for Fiscal Studies); Martin O'Connell (Institute for Fiscal Studies); Kate Smith (Institute for Fiscal Studies) |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:ifs:ifsewp:25/03 |
| By: | Xiao, Leon Y. (IT University of Copenhagen); Lund, Mie |
| Abstract: | Loot boxes in video games can be purchased with real-world money in exchange for random rewards. Stakeholders are concerned about loot boxes’ similarities with gambling and their potential harms (e.g., overspending money and developing gambling problems). The previous Conservative UK Government decided to first try relying on industry self-regulation to address the issue, rather than to impose legislation. These self-regulations have since been published by the industry trade body, Ukie (UK Interactive Entertainment). Responding to many stakeholders’ desire for a transparent and independent assessment of their implementation, we assessed companies’ compliance with three empirically testable measures and also whether the rules were actively enforced. The 100 highest-grossing iPhone games were longitudinally examined both prior to the self-regulations coming into effect on 18 July 2024 (i.e., between January and June 2024) and after to check for potential improvement (i.e., between July and December 2024). Disappointingly, widespread non-compliance and non-enforcement were observed. Amongst games with loot boxes, none (0.0%) sought to obtain explicit parental consent prior to enabling loot box purchasing by under-18s. Only 23.5% disclosed loot box presence, and the few disclosures were all visually obscured and difficult to access. A mere 8.6% consistently disclosed the probabilities of obtaining different rewards for all loot boxes found. The rules were not enforced, contrary to Ukie’s promise: all of the games that were non-compliant before the self-regulations came into effect remained non-compliant many months later, despite Ukie and the Apple App Store having been provided with evidence of the contraventions and put on notice to delist those games if remedial actions were not forthcoming. Platforms (e.g., app stores), the advertising regulator, and the consumer protection regulators must better enforce pre-existing rules to ensure adequate consumer protection as already promised. Video games and loot boxes are no longer novel; laws that apply to all industries must also be enforced against this one. Governments are advised against relying on industry self-regulation, especially after repeated demonstrations of its many failings. Stricter legal regulation of loot boxes should be adopted. Preregistered Stage 1 protocol: https://doi.org/10.17605/OSF.IO/3KNYB (date of in-principle acceptance: 25 March 2024). |
| Date: | 2025–01–07 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:xmwgy |