Strategic Withholding Through Production Failures

Anecdotal evidence indicates that electricity producers use production failures to disguise strategic reductions of capacity in order to influence prices, but systematic evidence is lacking. We use an instrumental variable approach and data from the Swedish electricity market to examine such behavior. In a market without strategic withholding, reported production failures should not depend directly on the market price. We show that marginal producers in part base their decision to report a failure on prices, which indicates that production failures are a result of economic incentives as well as of technical problems.