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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
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. repec:spo:wpmain:info:hdl:2441/1qif9fqehq930ovnr511k1el4f is not listed on IDEAS
    4. Michele Fioretti & Jorge Tamayo, 2021. "Saving for a Dry Day: Coal, Dams, and the Energy Transition," Sciences Po Economics Publications (main) hal-03389152, HAL.
    5. 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.
    6. 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.
    7. Heikki Peura & Derek W. Bunn, 2015. "Dynamic Pricing of Peak Production," Operations Research, INFORMS, vol. 63(6), pages 1262-1279, December.
    8. 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.
    9. Robles, Jack, 2016. "Infinite horizon hydroelectricity games," Working Paper Series 19421, Victoria University of Wellington, School of Economics and Finance.
    10. 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.
    11. repec:spo:wpecon:info:hdl:2441/1qif9fqehq930ovnr511k1el4f is not listed on IDEAS
    12. Robles, Jack, 2016. "Infinite horizon hydroelectricity games," Working Paper Series 5075, Victoria University of Wellington, School of Economics and Finance.

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