Vertical separation vs. independent downstream entry in an electricity network: Experimental insights

- We propose laboratory experiments studying the behavior by human subjects in a realistic simulated setting programmed.
- We address two alternative structural changes: vertical separation of corporations and independent entry of distributors.
- We find that both types of restructuring measures would lead to lower prices.
- Independent entry in the distribution sector would yield more significant price decreases.

We analyze a realistic simulation of a complex electricity network. We obtain the data with a series of experimental sessions designed to closely replicate the Spanish electricity market. In the experiments reported here we compare the status quo with two alternative regulatory market structures. In one of them, labeled as vertical separation, we impose that power generating firms and electricity distributors operate as independent business groups. In the second, we study the effect of entry by independent end-suppliers. Both alternative scenarios dominate the status quo in terms of market efficiency, but the latter of them dominates the former.