Optimal pricing behavior of vertically integrated utilities: Theory and evidence from the Italian electricity wholesale market

This paper models supply prices coordination in electricity markets in which a group of rms is vertically integrated. We analyze vertical integration by removing the assumption of perfect inter- rms information within a group. Then, we discuss the implication to price decisions of the presence of asymmetric (cost) information between generators and retailers within a simple P-A framework. This permits us to interpret the presence of a pro t gap with respect to the group's maximum pro t, as the result of a costly coordination activity between generator and retailer. The empirical investigation is conducted using Italian electricity auction data. Results show that bid prices posted by generators are signi cantly a ected (i.e. moderated) by variables incorporating vertical integration into the econometric model. We discuss the magnitude and significance of these findings.