Market Transparency and Relational Collusion in the Colombia Electricity Market

Category: Applied Microeconomics and Organization Seminar
When: 09 November 2022
, 14:15
 - 15:30
Where: RuW 4.201

Title: Market Transparency and Relational Collusion in the Colombia Electricity Market

(Mario Bernasconi (Tilburg University), Miguel Espinosa (Bocconi University), Rocco Macchiavello (London School of Economics), Carlos Suarez (Universitat Pompeu Fabra))

Abstract: This paper tests for, and quantifies the value of, collusive arrangements supported by relational contracting in the Colombia energy sector. We take advantage of the introduction of a market reform that extended the delay with which information about bids submitted to the industry regulator by energy generators would be disclosed to other market participants. By reducing market transparency, this reform makes harder for firms to sustain a collusive arrangement. We show that bids submitted by a subset of firms in the market collapsed immediately after the announcement of the reform, before it was was implemented. This suggests that some of these firms might have been part of an informal collusive arrangement that was made unsustainable by the regulation. Using factor analysis, we construct a proxy for cartel membership based on unit characteristics a priori correlated with incentives and ability to collude. Within an event-study framework, the resulting proxy captures well the observed drop in bids following the announcement. We rule out confounders and provide detailed forensic evidence of how the cartel functioned, uncovering both the incentives to collude and the mechanism through which firms colluded. A calibration of the dynamic incentives compatibility constraints associated with collusion confirms that a collusive arrangement was sustainable before, but not after, the reform. The cartel led to a substantial increase in the price paid for electricity. A back-of-the-envelope calculation suggests that the average consumer paid 4% higher energy bills as a result of the cartel.