Felix Höffler

On the Consistent Use of Linear Demand Systems if Not All Varieties are Available

Linear demand formulations for price competition in horizontally differentiated products are sometimes used to compare situations where additional varieties become available, e. g. due to market entry of new firms. We derive a consistent demand system to analyze such situations.

Monopoly Prices versus Ramsey-Boiteux Prices: Are they “Similar”, and: Does it Matter?

Ramsey-Boiteux prices and monopoly prices are frequently regarded as being similar. This might suggest that sometimes monopoly pricing is close to the Ramsey-Boiteux second best and welfare superior to imperfectly regulated prices. This paper tries to specify what is meant by “being similar”. Both sets of prices are similar in a theoretical sense but differ not only with respect to price levels but can even lead to different price orders. The paper discusses the impact of competition and stresses the difference between market and residual demand, which are important for the Ramsey-Boiteux and the monopoly problem, respectively. Copyright Springer Science + Business Media, Inc. 2006

Why Humans Care about Sunk Costs While Animals Don't. An Evolutionary Explanation

While humans often care about sunk investment, animals are not subject to this sort of sunk cost behavior or “Concorde fallacy”. This paper investigates a simple two stage decision problem under uncertainty. At the second stage, subjects can commit the Concorde fallacy by sticking to the first stage decision, independent of the state of nature revealed in-between. We investigate whether this can be beneficial in a standard payoff monotonic adaptation process. Committing the Concorde fallacy reduces the payoffs but accelerates the adaptation since it acts like “self-punishment”. It will, however, not only reduce the population growth rate in the long run but also the population size at any point in time in a biological evolutionary process. In this sense, animals can never benefit from the Concorde fallacy. Risk aversion gives an extra benefit to a behavior that more rapidly learns to avoid bad outcomes. If the wrong initial decision leads occasionally, albeit very infrequently, to a very low payoff, then risk averse humans will be better off by committing the Concorde fallacy.

Using Forward Contracts to Reduce Regulatory Capture

A fully unbundled, regulated network firm of unknown efficiency level can undertake unobservable effort to increase the likelihood of low downstream prices, e.g., by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can propose to the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but receives the expected value of the contracts when selling them to a competitive financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic probability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.

Benefits of coordinated control reserve activation and grid management — A probabilistic load flow analysis

Joint control reserve procurement and activation by several Transmission System Operators can have significant technical and economic benefits. In congested transmission networks, however, the activation of control reserve can be constrained by impending overloads. In this paper the benefits of an optimization to coordinate control reserve activation and grid management considering uncertainties caused by forecast errors is outlined. The effect of these uncertainties are measured by using probabilistic load flow methods based on convolution technique. A joint optimization is presented to minimize the costs of supplying control reserve and conducting redispatch, taking into account HVDC lines, variable costs of power plants and the impact of control reserve activation on lines instead of optimizing it separately as it is the current proceeding by European Transmission System Operators. In addition, a method to determine the solution space for permissible control reserve distributions is presented. In a case study of the German transmission grid for the year 2024 the costs of the joint optimization are contrasted to the costs using the normal merit order and additional redispatch as it is the current market scheme. With the simulation for one year, the solution spaces are calculated to show, which power plants can supply control reserve in every hour without causing redispatch measures and whether the existing power plants in 2024 are sufficient to provide control reserve activation without impending overloads.

Germany's Wind and Solar Deployment 1991 - 2015

In this case study, Germany´s wind and solar deployment from 1991 to 2015 is analyzed with wind and solar representing a major pillar in Germany´s energy transition. Germany´s NREAP capacity goals for wind and solar power have been outreached, amongst others due to the (at times) generous and investor-risk minimizing feed-in tariff system (EEG) as well as supportive grid connection conditions for renewable energy generators. For a successful integration of further amounts of wind and solar energy, system flexibility, amongst others via a stronger integration of the European electricity market, is key. Also, market design adjustments will become necessary, for which the two in this research cooperation with Stanford University analyzed electricity markets in California and Texas can represent best-practice examples with regard to short-term gate closure times and regionalized electricity pricing.

Using Forward Contracts to Reduce Regulatory Capture: Using Forward Contracts to Reduce Regulatory Capture

A fully unbundled, regulated network firm of unknown efficiency level can untertake unobservable effort to increase the likelihood of low downstream prices, e.g. by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can force the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but recieves the expected value of the contracts when selling them to a competivitve financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic propability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.