Capacity choice, Technology mix and market power

Summary : This paper investigates strategic capacity choices in an electricity markets with heterogenous firms. With a competitive wholesale market, the paper focusses on long term strategic investment. Two technologies are available to produce electricity, both are efficient and used at a first best optimum. When all firms cannot invest in both technologies there can be over investment in one of these. Furthermore, even a firm that can invest in both may be deter from investing in one of them and specialized. If the number of firms that can invest in a particular technology is limited, the development of competition only through the other technology can decrease welfare.