The Extent of the Market and Integration Through Factor Markets: Evidence from Wholesale Electricity

Abstract

We document the in uence of factor markets in determining the extent of the market, by appealing to the Mundell Hypothesis that trade in goods markets and factor markets are substitutes. We conrm this in uence using the U.S. wholesale market for electric power. Although the Eastern, Western, and Texas regions cannot trade electricity, inputs such as natural gas move freely across these regions. Through both a set of price transmission ratios, and a supply model for natural gas, we nd regional electricity shocks do propagate across regions. We conclude output markets institutionally in autarky are economically integrated through factor markets.