Price Wars and Collusion in the Spanish Electricity Market

Abstract

We analyze the time-series of prices in the Spanish electricity market by means of a time varying-transition-probability Markov switching model. Accounting for changes in demand and cost conditions (which re°ect changes in input costs, capacity avail- ability and hydro power), we show that the time-series of prices is characterized by two signi¯cantly di®erent price levels. Based on a Green and Porter (1984)'s type of model that introduces several institutional details, we construct trigger variables that a®ect the likelihood of starting a price war. By interpreting the signs of the triggers, we are able to infer some of the properties of the collusive strategy that ¯rms might have followed. We obtain more empirical support to Green and Porter's model than previous studies.