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Limit pricing and entry game of renewable energy firms into the energy sector

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  • Semmler, Willi
  • Di Bartolomeo, Giovanni
  • Minooei Fard, Behnaz
  • Braga, Joao Paulo

Abstract

Governments attempt to provide the energy sector with incentives to replace old technologies with new renewable energy ones as the most effective way to combat climate change. Yet, in the energy sector prevail fossil fuel incumbents that might inhibit renewable energy entrants. Our paper provides a game-theoretic stylization of competition between those two types of firms. Incumbents set prices, and entrants respond with quantity adjustments. In the context of a dynamic limit pricing model, we study the entry dynamics in a market in which the dominant firms (fossil fuel energy suppliers) face the entry of a group of competitive fringe firms (renewable energy suppliers) when the dominant firms have easier access to financial markets but, the fringe firms fund their expansion with internal finance. We also investigate the effect of the public support for renewable energy firms through subsidies. Our model is built on Judd and Peterson (1986, JET), but our solutions are obtained through a non-linear model predictive control (NMPC) algorithm. By this technique, we can predict the outcome of the competition between incumbents and entrants and the impact of financial and fiscal policies considering moving-horizon strategies.

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  • Semmler, Willi & Di Bartolomeo, Giovanni & Minooei Fard, Behnaz & Braga, Joao Paulo, 2022. "Limit pricing and entry game of renewable energy firms into the energy sector," Structural Change and Economic Dynamics, Elsevier, vol. 61(C), pages 179-190.
    • Handle: RePEc:eee:streco:v:61:y:2022:i:c:p:179-190
    DOI: 10.1016/j.strueco.2022.01.008
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    3. Braga, Joao Paulo & Semmler, Willi & Grass, Dieter, 2021. "De-risking of green investments through a green bond market – Empirics and a dynamic model," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).

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    More about this item

    Keywords

    Global warming; Renewable energy; Limit pricing; Strategic entry game; and non-linear model predictive control;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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