Vertical Unbundling, The Coordination Of Investment, And Network Pricing

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Executive Summary

This paper provides a formal analysis on the investment coordination problem in a vertically separated electricity supply industry, although the analysis may apply also to other network industries. In an electricity system, the investment decisions of network and power plants need to be coordinated. In unbundled markets, firm-internal coordination no longer applies. The authors develop a formal approach to examine whether simple information exchange ("Cheap talk") could restore coordination. They adopt a three-stage profit-optimized investment model, with a (regulated) monopoly network and two asymmetrical Cournot-type generators.

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