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On Quantity Competition and Transmission Constraints in Electricity Market

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  • Daniel A. Benitez

Abstract

In this paper we characterize equilibria in a quantity game where symmetric firms face a local demand together with an export-constrained demand. Firms have unlimited access to a local demand but a restricted access to a second market, like in the electricity network where generators compete to satisfy demand but competition is restricted by transmission capacity. We show the existence of an effective demand that is continuous but not differentiable due to the transmission constraint. Three types of equilibria emerge in this context, parametrized by capacity. First, a symmetric equilibrium (unique) when the access to the second market is constrained. Second, a set of continuous and asymmetric equilibria with a fully used link but not constrained; and finally, a symmetric and unique equilibrium in which the link is not fully used. We also show how multiplicity of equilibria tends to disappear as the number of competitors increase

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 98.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:98

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Keywords: electricity markets; Cournot games; capacity constraints;

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  1. Paul L. Joskow & Richard Schmalensee, 1988. "Markets for Power: An Analysis of Electrical Utility Deregulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262600188, December.
  2. Bert Willems, 2000. "Cournot Competition in the Electricity Market with Transmission Constraints," Center for Economic Studies - Discussion papers ces0024, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  3. SMEERS, Yves & WEI, Jing- Yuan, 1997. "Spatially oligopolistic model with opportunity cost pricing for transmission capacity reservations - A variational inequality approach," CORE Discussion Papers 1997017, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Severin Borenstein & James Bushnell & Steven Stoft, 1997. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," NBER Working Papers 6293, National Bureau of Economic Research, Inc.
  5. Klemperer, Paul, 2000. "Why every Economist should Learn some Auction Theory," CEPR Discussion Papers 2572, C.E.P.R. Discussion Papers.
  6. Richard Gilbert & Neuhoff, K. & Newbery, D., 2002. "Allocating Transmission to Mitigate Market Power in Electricity Networks," Cambridge Working Papers in Economics 0225, Faculty of Economics, University of Cambridge.
  7. Chao, Hung-Po & Peck, Stephen, 1996. "A Market Mechanism for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 10(1), pages 25-59, July.
  8. Bushnell, James, 1999. "Transmission Rights and Market Power," The Electricity Journal, Elsevier, vol. 12(8), pages 77-85, October.
  9. Natalia Fabra & Nils-Henrik von der Fehr & David Harbord, 2002. "Designing Electricity Auctions," Microeconomics 0211017, EconWPA, revised 31 Aug 2003.
  10. George J. Mailath, 1998. "Do People Play Nash Equilibrium? Lessons from Evolutionary Game Theory," Journal of Economic Literature, American Economic Association, vol. 36(3), pages 1347-1374, September.
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