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Figure 1: Typical Industry Marginal cost of producing electricity in Germany, 2006.

for a single firm under the objective of welfare maximization can easily be extended to the case of perfectly competitive firms in liberalized markets. In a recent contribution Joskow and Tirole (2007) thoroughly discuss all those results in the light of perfectly competitive restructured electricity markets. All the results obtained in the peak load pricing literature, however, are not applicable in case firms do not behave perfectly competitive, but interact strategically when making their investment decisions.

Especially in Europe policy makers are seriously concerned by the exercise of market power in the electricity sector, which has been extensively analyzed and documented for the wholesale markets.3 Very little is known, if and how market power is exercised in those markets in the long run, when firms make their investment decisions. The results obtained for the spot markets, however, give little reason to expect perfectly competitive behavior (of the same firms) in the long run. Strategic interaction of several firms has thus to be taken into account, if meaningful predictions regarding firms investment incentives in liberalized

3A recent study presented by the European Commission (2007) entitled ”Structure and Performance of Six European Wholesale Electricity Markets in 2003, 2004 and 2005” detects considerable market power at several spot markets, e.g. for Germany.

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