IDEAS home Printed from https://ideas.repec.org/a/inm/oropre/v53y2005i2p231-241.html
   My bibliography  Save this article

Dynamic Pricing and Learning in Electricity Markets

Author

Listed:
  • Alfredo Garcia

    (Systems and Information Engineering Department, University of Virginia, Charlottesville, Virginia 22904)

  • Enrique Campos-Nañez

    (Department of Engineering Management and Systems Engineering, The George Washington University, Washington, DC 20052)

  • James Reitzes

    (The Brattle Group, 1133 20th Street, NW, Washington, DC 20036)

Abstract

We analyze the price-formation process in an infinite-horizon oligopoly model where hydroelectric generators engage in dynamic price-based competition. The analysis focuses on the role of “indifference” prices, i.e., prices that equate the gains from releasing or storing water. Strategies where players bid their indifference prices and the marginal player undercuts the lowest-cost unsuccessful bidder constitute a Markov Perfect Equilibrium (MPE) under appropriate conditions. These conditions involve symmetric production capacity and nonfractional (i.e., “all or nothing”) output by successful bidders. Although the MPE solution represents an equilibrium consistent with dynamic strategic behavior, it requires computational sophistication by market participants. However, a basic “learning” procedure involving indifference prices converges to an MPE.

Suggested Citation

  • Alfredo Garcia & Enrique Campos-Nañez & James Reitzes, 2005. "Dynamic Pricing and Learning in Electricity Markets," Operations Research, INFORMS, vol. 53(2), pages 231-241, April.
    • Handle: RePEc:inm:oropre:v:53:y:2005:i:2:p:231-241
    DOI: 10.1287/opre.1040.0159
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/opre.1040.0159
    Download Restriction: no
    File URL: https://libkey.io/10.1287/opre.1040.0159?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Milgrom, Paul & Roberts, John, 1991. "Adaptive and sophisticated learning in normal form games," Games and Economic Behavior, Elsevier, vol. 3(1), pages 82-100, February.
    2. E. J. Anderson & A. B. Philpott, 2002. "Using Supply Functions for Offering Generation into an Electricity Market," Operations Research, INFORMS, vol. 50(3), pages 477-489, June.
    3. Rafael Kelman & Luiz Barroso & Mario Pereira, 2005. "Market Power Assessment and Mitigation in Hydrothermal Systems," Game Theory and Information 0508009, University Library of Munich, Germany.
    4. Garcia, Alfredo & Arbelaez, Luis E., 2002. "Market power analysis for the Colombian electricity market," Energy Economics, Elsevier, vol. 24(3), pages 217-229, May.
    5. Severin Borenstein & James Bushnell & Christopher R. Knittel, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 65-88.
    6. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-953, October.
    7. Severin Borenstein & James Bushnell, 1999. "An Empirical Analysis of the Potential for Market Power in California’s Electricity Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 285-323, September.
    8. V. S. Borkar, 2002. "Reinforcement Learning In Markovian Evolutionary Games," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 55-72.
    9. Garcia, Alfredo & Reitzes, James D & Stacchetti, Ennio, 2001. "Strategic Pricing when Electricity is Storable," Journal of Regulatory Economics, Springer, vol. 20(3), pages 223-247, November.
    10. James Bushnell, 2003. "A Mixed Complementarity Model of Hydrothermal Electricity Competition in the Western United States," Operations Research, INFORMS, vol. 51(1), pages 80-93, February.
    11. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-546, May.
    12. Aleksandr Rudkevich & Max Duckworth & Richard Rosen, 1998. "Modeling Electricity Pricing in a Deregulated Generation Industry: The Potential for Oligopoly Pricing in a Poolco," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 19-48.
    13. Monderer, Dov & Shapley, Lloyd S., 1996. "Fictitious Play Property for Games with Identical Interests," Journal of Economic Theory, Elsevier, vol. 68(1), pages 258-265, January.
    14. Crampes, C. & Moreaux, M., 2001. "Water resource and power generation," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 975-997, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michele Fioretti & Jorge Tamayo, 2021. "Saving for a Dry Day: Coal, Dams, and the Energy Transition," Working Papers hal-03389152, HAL.
    2. Dong Gu Choi & Michael K. Lim & Karthik Murali & Valerie M. Thomas, 2020. "Why Have Voluntary Time‐of‐Use Tariffs Fallen Short in the Residential Sector?," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 617-642, March.
    3. Yang, Liu & Dong, Ciwei & Wan, C.L. Johnny & Ng, Chi To, 2013. "Electricity time-of-use tariff with consumer behavior consideration," International Journal of Production Economics, Elsevier, vol. 146(2), pages 402-410.
    4. Heikki Peura & Derek W. Bunn, 2015. "Dynamic Pricing of Peak Production," Operations Research, INFORMS, vol. 63(6), pages 1262-1279, December.
    5. Jorge Balat & Juan E. Carranza & Juan D. Martin, 2015. "Dynamic and Strategic Behavior in Hydropower-Dominated Electricity Markets: Empirical Evidence for Colombia," Borradores de Economia 12906, Banco de la Republica.
    6. Kimmo Berg & Harri Ehtamo, 2012. "Continuous learning methods in two-buyer pricing problem," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 75(3), pages 287-304, June.
    7. Albert Banal-Estañol & Augusto Rupérez Micola, 2009. "Composition of Electricity Generation Portfolios, Pivotal Dynamics, and Market Prices," Management Science, INFORMS, vol. 55(11), pages 1813-1831, November.
    8. repec:hal:spmain:info:hdl:2441/1qif9fqehq930ovnr511k1el4f is not listed on IDEAS
    9. repec:hal:wpspec:info:hdl:2441/1qif9fqehq930ovnr511k1el4f is not listed on IDEAS
    10. Banal-Estañol, Albert & Rupérez Micola, Augusto, 2011. "Behavioural simulations in spot electricity markets," European Journal of Operational Research, Elsevier, vol. 214(1), pages 147-159, October.
    11. Robles, Jack, 2016. "Infinite horizon hydroelectricity games," Working Paper Series 19421, Victoria University of Wellington, School of Economics and Finance.
    12. Robles, Jack, 2016. "Infinite horizon hydroelectricity games," Working Paper Series 5075, Victoria University of Wellington, School of Economics and Finance.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Petter Vegard Hansen, 2009. "Inflow Uncertainty in Hydropower Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(1), pages 189-207, March.
    2. Pär Holmberg & Andy Philpott, 2014. "Supply function equilibria in transportation networks," Cambridge Working Papers in Economics 1421, Faculty of Economics, University of Cambridge.
    3. Jorge Balat & Juan E. Carranza & Juan D. Martin, 2015. "Dynamic and Strategic Behavior in Hydropower-Dominated Electricity Markets: Empirical Evidence for Colombia," Borradores de Economia 886, Banco de la Republica de Colombia.
    4. Suarez, Carlos, 2022. "Private management and strategic bidding behavior in electricity markets: Evidence from Colombia," Energy Economics, Elsevier, vol. 111(C).
    5. Holmberg, Pär & Newbery, David, 2010. "The supply function equilibrium and its policy implications for wholesale electricity auctions," Utilities Policy, Elsevier, vol. 18(4), pages 209-226, December.
    6. Guido Pepermans & Bert Willems, 2004. "Ramsey Pricing in a Congested Network with Market Power in Generation: A Numerical Illustration for Belgium," Energy, Transport and Environment Working Papers Series ete0408, KU Leuven, Department of Economics - Research Group Energy, Transport and Environment.
    7. Holmberg, Pär, 2009. "Numerical calculation of an asymmetric supply function equilibrium with capacity constraints," European Journal of Operational Research, Elsevier, vol. 199(1), pages 285-295, November.
    8. Genc, Talat S. & Thille, Henry & ElMawazini, Khaled, 2020. "Dynamic competition in electricity markets under uncertainty," Energy Economics, Elsevier, vol. 90(C).
    9. Holmberg, Pär & Newbery, David & Ralph, Daniel, 2013. "Supply function equilibria: Step functions and continuous representations," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1509-1551.
    10. Robles, Jack, 2016. "Infinite horizon hydroelectricity games," Working Paper Series 5075, Victoria University of Wellington, School of Economics and Finance.
    11. van Ackere, Ann & Ochoa, Patricia, 2010. "Managing a hydro-energy reservoir: A policy approach," Energy Policy, Elsevier, vol. 38(11), pages 7299-7311, November.
    12. Ventosa, Mariano & Baillo, Alvaro & Ramos, Andres & Rivier, Michel, 2005. "Electricity market modeling trends," Energy Policy, Elsevier, vol. 33(7), pages 897-913, May.
    13. Bunn, Derek W. & Oliveira, Fernando S., 2007. "Agent-based analysis of technological diversification and specialization in electricity markets," European Journal of Operational Research, Elsevier, vol. 181(3), pages 1265-1278, September.
    14. Swider, Derk J. & Weber, Christoph, 2007. "Bidding under price uncertainty in multi-unit pay-as-bid procurement auctions for power systems reserve," European Journal of Operational Research, Elsevier, vol. 181(3), pages 1297-1308, September.
    15. Garcia-Diaz, Anton & Marin, Pedro L., 2003. "Strategic bidding in electricity pools with short-lived bids: an application to the Spanish market," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 201-222, February.
    16. Heikki Peura & Derek W. Bunn, 2015. "Dynamic Pricing of Peak Production," Operations Research, INFORMS, vol. 63(6), pages 1262-1279, December.
    17. Wolf-Peter Schill & Claudia Kemfert, 2011. "Modeling Strategic Electricity Storage: The Case of Pumped Hydro Storage in Germany," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 59-88.
    18. David Andrés‐Cerezo & Natalia Fabra, 2023. "Storing power: market structure matters," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 3-53, March.
    19. Holmberg, Pär & Philpott, Andrew, 2012. "Supply Function Equilibria in Networks with Transport Constraints," Working Paper Series 945, Research Institute of Industrial Economics, revised 10 Aug 2015.
    20. Berry, Carolyn A. & Hobbs, Benjamin F. & Meroney, William A. & O'Neill, Richard P. & StewartJr, William R., 1999. "Understanding how market power can arise in network competition: a game theoretic approach," Utilities Policy, Elsevier, vol. 8(3), pages 139-158, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:oropre:v:53:y:2005:i:2:p:231-241. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.