Strategic Generation Capacity Choice under Demand Uncertainty: Analysis of Nash Equilibria in Electricity Markets
AbstractAbstract: We analyze a two-stage game of strategic firms facing uncertain demand and exerting market power in decentralized electricity markets. These firms choose their generation capacities at the first stage while anticipating a perfectly competitive future electricity spot market outcome at the second stage; thus it is a closed loop game. In general, such games can be formulated as an equilibrium problem with equilibrium constraints (EPEC) and examples have been posed in the literature that have multiple or no equilibria. Therefore, it is of interest to define general sets of conditions under which solutions exist and are unique, which would enhance the value of such models for policy andmarket intelligence purposes. In this paper, we consider various types of such a closed loop model regarding the underlying price-demand relations (elastic and inelastic demand), the assumed demand uncertainty with a broad class of continuous distributions, and any finite number of players with symmetric or asymmetric costs. We establish sufficient conditions for the random demand’s probability distribution which guarantee existence and uniqueness of equilibria in most of the cases of this closed loop model. We identify a broad class of commonly used continuous probability distributions satisfying these conditions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2013-044.
Date of creation: 2013
Date of revision:
Contact details of provider:
Web page: http://center.uvt.nl
electricity markets; strategic generation investment modeling; demand uncertainty; existence and uniqueness of equilibrium;
Find related papers by JEL classification:
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-31 (All new papers)
- NEP-COM-2013-08-31 (Industrial Competition)
- NEP-ENE-2013-08-31 (Energy Economics)
- NEP-GTH-2013-08-31 (Game Theory)
- NEP-IND-2013-08-31 (Industrial Organization)
- NEP-MIC-2013-08-31 (Microeconomics)
- NEP-REG-2013-08-31 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- GABSZEWICZ, Jean J. & PODDAR , Sougata, 1995.
"Demand Fluctuations and Capacity Utilization under Duopoly,"
CORE Discussion Papers
1995051, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Jean J. Gabszewicz & Sougata Poddar, 1997. "Demand fluctuations and capacity utilization under duopoly," Economic Theory, Springer, vol. 10(1), pages 131-146.
- Gabszewicz, J.J. & Poddar, S., . "Demand fluctuations and capacity utilization under duopoly," CORE Discussion Papers RP -1269, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Borenstein, Severin & Bushnell, James, 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.
- Severin Borenstein & James Bushnell, 1998. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," NBER Working Papers 6463, National Bureau of Economic Research, Inc.
- David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
- Veronika Grimm & Gregor Zoettl, 2006. "Capacity Choice under Uncertainty: The Impact of Market Structure," Working Paper Series in Economics 23, University of Cologne, Department of Economics.
- Grimm, Veronika & Zoettl, Gregor, 2008. "Strategic capacity choice under uncertainty: the impact of market structure on investment and welfare," IWQW Discussion Paper Series 01/2008, Friedrich-Alexander-Universität Erlangen-Nürnberg, Institut für Wirtschaftspolitik und Quantitative Wirtschaftsforschung (IWQW).
- Daniel De Wolf & Yves Smeers, 1997. "A Stochastic Version of a Stackelberg-Nash-Cournot Equilibrium Model," Management Science, INFORMS, vol. 43(2), pages 190-197, February.
- Bagnoli, M. & Bergstrom, T., 1989.
"Log-Concave Probability And Its Applications,"
89-23, Michigan - Center for Research on Economic & Social Theory.
- Lagerlöf Johan N.M., 2006. "Equilibrium Uniqueness in a Cournot Model with Demand Uncertainty," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-6, December.
- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).
If references are entirely missing, you can add them using this form.