2020/01/10 by Mel T. Devine, Devine, Mel T., Sauleh Siddiqui +1
Economics, Econometrics and Finance · Engineering · Mathematics · #Complementarity (molecular biology) #Cournot competition #Economics #Electric Power System Optimization #Electricity #Electricity market #FOS: Mathematics #ICT Impact and Policies #Industrial organization #Investment (military) #Investment decisions #Marginal cost #Market power #Merger and Competition Analysis #Microeconomics #Monopoly #Oligopoly #Optimization and Control (math.OC) #Perfect competition #Production (economics) #Smart Grid Energy Management #math.OC
paper · pdf · doi:10.48550/arxiv.2001.03526
37 pages, 16 figures
arxiv created 2020/01/10 · openalex publication_date 2020/01/10 · arxiv updated 2020/01/13 · openalex created_date 2022/07/26 · openalex updated_date 2026/08/06
Market power behaviour often occurs in modern wholesale electricity markets.\nMixed Complementarity Problems (MCPs) have been typically used for\ncomputational modelling of market power when it is characterised by an\noligopoly with competitive fringe. However, such models can lead to myopic and\ncontradictory behaviour. Previous works in the literature have suggested using\nconjectural variations to overcome this modelling issue. We first show however,\nthat an oligopoly with competitive fringe where all firms have investment\ndecisions, will also lead to myopic and contradictory behaviour when modelled\nusing conjectural variations. Consequently, we develop an Equilibrium Problem\nwith Equilibrium Constraints (EPEC) to model such an electricity market\nstructure. The EPEC models two types of players: price-making firms, who have\nmarket power, and price-taking firms, who do not. In addition to generation\ndecisions, all firms have endogenous investment decisions for multiple new\ngenerating technologies. The results indicate that, when modelling an oligopoly\nwith a competitive fringe and generation investment decisions, an EPEC model\ncan represent a more realistic market structure and overcome the myopic\nbehaviour observed in MCPs. The EPEC considered found multiple equilibria for\ninvestment decisions and firms' profits. However, market prices and consumer\ncosts were found to remain relatively constant across the equilibria. In\naddition, the model shows how it may be optimal for price-making firms to\noccasionally sell some of their electricity below marginal cost in order to\nde-incentivize price-taking firms from investing further into the market. Such\nstrategic behaviour would not be captured by MCP or cost-minimisation models.\n