We analyze horizontal subcontracting and show how idle production facilities can reduce contracting costs by credibly protecting against hold-up. Our analysis contributes to understanding competition between power firms that increasingly use intermittent generation sources. Their unilateral incentives to invest in maintaining underused units, such as dispatchable gas-fired plants, are underrated by plant profitability indicators. From a policy perspective, decentralized strategic investment incentives reduce the possible need for centralized security of supply measures. Our welfare analysis indicates that quantity competition can lead to a lower market-clearing price than price competition.
|Referentgranskad vetenskaplig tidskrift||International Journal of Industrial Organization|
|Status||Publicerad - 05.2017|
|MoE-publikationstyp||A1 Originalartikel i en vetenskaplig tidskrift|
- 511 Nationalekonomi