When Market Incompleteness Is Preferable to Market Power: Insights from Power Markets

Since the liberalization of power markets in Europe, almost all investments have required some form of subsidy, due in part to the incomplete nature of the market. In that respect, the literature has consistently shown the benefits of risk-sharing instruments to boost investments. Because of entry barriers, however, some producers today might find themselves in a dominant position. In “When market incompleteness is preferable to market power. Insights from power markets,” Ibrahim Abada and Andreas Ehrenmann investigate the impact of completing a market with financial contracts in the presence of market power. To do so, the authors formulate a set of stochastic equilibrium investment models of risk-averse agents with possibly two types of market failure: incompleteness and market power. They provide existence results and conduct a thorough numerical application inspired by the French case. Contrary to what is reported in the literature, the authors highlight conditions under which social welfare is worse off when partially completing the market with contracts in the presence of a price-making incumbent.