Estimating market power by introducing a new Lerner index in the Iranian electricity market

ABSTRACT

Based on the economic theories, the marginal cost pricing guarantees the efficiency in the competitive equilibrium. However, in the pay-as-bid auction, the competitive bid function is not a marginal cost. This observation leads to a new definition of the Lerner index. In fact, the new definition of the Lerner index is based on the competitive bid in the pay-as-bid auction. This study applies the method in question to Iranian electricity market. Consequently, the main objective of this study is to obtain a competitive benchmark for the Iranian electricity market, and, then, make a comparison between the proposed and the typical Lerner indices. The results indicate that there is a significant difference between the proposed Lerner index and its typical counterpart. Moreover, the study suggests that in the Iranian electricity market, market power arises mainly during periods of low demand.

KEYWORDS:

• Iranian electricity market
• Lerner index
• market efficiency
• market power
• pay-as-bid auction

Notes

¹ This study exploits a simulation of the Iranian electricity market, and, thus, the results are based on this simulated market. It is crystal clear that when simulating a market, its real conditions will be accounted for. Therefore, based on the executive procedure of bidding in the Iranian electricity market, pollution cost need not be considered.