Market power in California’s water market

Abstract

We estimate market power in California’s thin water market. Market frictions may distort the potential welfare gains from water marketing. We use a Nash-Cournot model and derive a closed-form solution for the extent of market power in a typical water market setting. We then use this solution to estimate market power in a newly assembled dataset on California’s water economy. We show that, under the assumptions of the Cournot model, market power in this thin market is limited. Keywords: Water markets, Market power, California, Cournot-Nash. JEL classification: C72, D43, Q25