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On Quantity Competition and Transmission Constraints in Electricity Market


  • Daniel A. Benitez


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

Suggested Citation

  • Daniel A. Benitez, 2004. "On Quantity Competition and Transmission Constraints in Electricity Market," Econometric Society 2004 Latin American Meetings 98, Econometric Society.
  • Handle: RePEc:ecm:latm04:98

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    References listed on IDEAS

    1. Natalia Fabra & Nils‐Henrik Fehr & David Harbord, 2006. "Designing electricity auctions," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 23-46, March.
    2. 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, July.
    3. Paul Klemperer, 2000. "Why Every Economist Should Learn Some Auction Theory," Microeconomics 0004009, EconWPA.
    4. Bert Willems, 2000. "Cournot Competition in the Electricity Market with Transmission Constraints," Working Papers Department of Economics ces0024, KU Leuven, Faculty of Economics and Business, Department of Economics.
    5. Bushnell, James, 1999. "Transmission Rights and Market Power," The Electricity Journal, Elsevier, vol. 12(8), pages 77-85, October.
    6. Severin Borenstein & James. Bushnell & Steven Stoft, 2000. "The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 294-325, Summer.
    7. 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.
    8. 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.
    9. 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.
    10. 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).
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    More about this item


    electricity markets; Cournot games; capacity constraints;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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