Investments in Electricity Generation Capacity under Different Market Structures with Price Responsive Demand
Investments in Generation Capacities by a social planner, by a monopolist and by two competing firms are compared when electricity demand is uncertain but price responsive. A unit price auction determines the electricity price when firms compete. Firms know the level of demand when they bid their capacities. With simultaneous capacity choices total capacities are always larger than with a monopoly if a subgame perfect equilibrium in pure strategies exists. With sequential capacity choices existence is always ensured and the aggregate capacity is smaller in the duopoly than with a monopolist if capacity costs are very low. Capacities always fall short of the socially efficient level.
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