Production or transmission investments? A comparative analysis

The European electricity market is moving towards an integration process, and to facilitate that integration and the flow of electricity in that market, the European Transmission System Operator proposes different investments in transmission and production capacities. I develop a model of imperfect competition to study those investments, and I identify the economic forces that determine the equilibrium price and the flow of electricity: The size and the competitive effects. I prove formally when those forces operate simultaneously or independently, and how they determine consumers' surplus and suppliers' profits. I prove that an investment in transmission capacity outperforms an investment in production capacity by maximizing consumers' welfare, but the performance in terms of suppliers' profits is ambiguous.