Complementarity and Market Power in Electricity Supply Chains

This research seeks to understand the economics of supply chains where complementary suppliers may have market power. The objectives of this research are to evaluate the economic efficiency of the U.S. coal supply chain over the last thirty years, accounting for complementarities and market power, and to understand how efficiencies might have been impacted by changes in supplier market structure (e.g. mergers between coal suppliers), changes in the competitiveness of coal (e.g. after the U.S. natural gas boom), and the deregulation of wholesale electricity markets. These are important questions to address for this major industry. In this research, methods are developed that also could be applied in other industries. The research effort includes training of Ph.D. students, coordination of activities across schools at a land grant public university, and the presentation of the results to a wide range of stakeholders. The research involves three related projects that are made possible by combining confidential data on railroad shipments and power plant purchases of coal and transportation. Project 1 uses reduced-form econometric techniques to describe how shocks to electricity demand, shocks to electricity generating costs, and upstream shocks to the mining and railroad industries feed through into input prices and quantities. The results are interpreted through the lens of a theoretical models based on Cournot (1838) and Spulber (2017), which identify the possible effects of input complementarity with market power. Project 2 develops and estimates a static structural model of the supply chain and power plant output decisions. This model quantifies how supplier and downstream market power has varied over time and across space, and investigates the implications for counterfactuals (e.g., the introduction and elimination of subsidies for non-fossil fuel production or industry consolidation). Project 3 introduces dynamics into the model, testing whether prices are shaped partly by parties trying to anticipate and affect future changes in market structure (e.g., delay coal plant retirements) and, if so, estimating the effects on stylized counterfactuals, building on recent theoretical literature studying the effects of procurement on endogenous market structure. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.