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Strategic bidding of offer curves: An agent-based approach to exploring supply curve equilibria

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  • Kimbrough, Steven O.
  • Murphy, Frederic H.

Abstract

We model a market in which suppliers bid step-function offer curves using agent-based modeling. Our model is an abstraction of electricity markets where step-function offer curves are given to an independent system operator that manages the auctions in electricity markets. Positing an elementary and computationally accessible learning model, Probe and Adjust, we present analytic results that characterize both the behavior of the learning model and the properties of step-function equilibria. Thus, we have developed a framework for validating agent-based models prior to using them in situations that are too complicated to be analyzed using traditional economic theory. In addition, we demonstrate computationally that, by using alternative policies, even simple agents can achieve monopoly rewards for themselves by pursuing more industry-oriented strategies. This raises the issue of how participants in oligopolistic markets actually behave.

Suggested Citation

  • Kimbrough, Steven O. & Murphy, Frederic H., 2013. "Strategic bidding of offer curves: An agent-based approach to exploring supply curve equilibria," European Journal of Operational Research, Elsevier, vol. 229(1), pages 165-178.
  • Handle: RePEc:eee:ejores:v:229:y:2013:i:1:p:165-178
    DOI: 10.1016/j.ejor.2013.02.006
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    References listed on IDEAS

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    1. David M. Newbery, 2005. "Electricity liberalization in Britain: The quest for a satisfactory wholesale market design," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 43-70.
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    12. Wang, Lizhi & Mazumdar, Mainak & Bailey, Matthew D. & Valenzuela, Jorge, 2007. "Oligopoly models for market price of electricity under demand uncertainty and unit reliability," European Journal of Operational Research, Elsevier, vol. 181(3), pages 1309-1321, September.
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