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Gebhardt, Georg and Höffler, Felix (April 2008): How to Determine whether Regional Markets are Integrated? Theory and Evidence from European Electricity Markets. SFB/TR 15 Discussion Paper No. 236 [PDF, 1MB]

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Prices may di er between regional markets if transport capacities are limited. We develop a new approach to determine to which extent such di erences stem from limited participation in cross-border trader rather than from bottlenecks. We derive a theoretical integration benchmark for the typical case where transportation markets clear before the product markets, using Grossman's (1976) notion of a rational expectations equilibrium. We compare the benchmark to data from European electricity markets. The data reject the integration hypothesis: Capacity prices contain too little information about spot price di erential; this indicates that well informed traders do not engage in cross-border trade.

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