Asymmetric Price Transmission in Supply Function Equilibrium, Carbon Prices and the German Electricity Spot Market

Nikolas Wölfing

No 08-040, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: In January 2007, first evidence of an asymmetric pass-through of CO2 emission allowance prices was reported for the German electricity spot market. This paper explores the theoretical basis for such an asymmetry in the context of a supply function bidding duopoly. It interprets fluctuating carbon prices as a coordination mechanism for tacitly colluding firms and studies incentive compatibility in the repeated game. It is new in its attempt to model asymmetric behaviour in a spot market without relevant frictions, and gives a reasoning why the asymmetry shows up for emission allowances only. The paper concludes with a theorem: that asymmetric price transmission is sustained up to a certain maximum level which might include the monopoly solution and that this mechanism is always preferred to non-cooperation.

Keywords: Asymmetric price transmission; Electricity spot markets; Emission allowances (search for similar items in EconPapers)
JEL-codes: C73 D82 L13 Q41 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-com and nep-ene
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:7346

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