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Cournot Competition in the Electricity Market with Transmission Constraints

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  • Bert Willems

Abstract

This paper studies the market power of generators in the electricity market when transmission capacity is scarce. We consider a simple world of two generators providing electricity to their consumers through a single transmission line. In the literature, different Cournot equilibrium concepts have been developed. This paper applies these concepts and explains the implicit assumptions on the behavior of the System Operator made in those papers. We show that these implicit assumptions are not realistic. For an alternative role of the System Operator, we solve the Cournot equilibrium and compare the outcome. Furthermore, we show that the axiomatic equilibrium concept of Smeers and Wei (1997) is linked with the model of Oren (1997) and can also be defined as a Nash Equilibrium.

Suggested Citation

  • 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.
  • Handle: RePEc:ete:ceswps:ces0024
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    Cited by:

    1. Guido Pepermans & Bert Willems, 2005. "The Potential Impact of Cross-Ownership in Transmission: an Application to the Belgian Electricity Market," Working Papers Department of Economics ces0503, KU Leuven, Faculty of Economics and Business, Department of Economics.
    2. Zerrahn, Alexander & Huppmann, Daniel, 2014. "Network Expansion to Mitigate Market Power: How Increased Integration Fosters Welfare," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100459, Verein für Socialpolitik / German Economic Association.
    3. Robert Wilson, 2008. "Supply Function Equilibrium in a Constrained Transmission System," Operations Research, INFORMS, vol. 56(2), pages 369-382, April.
    4. Daniel A. Benitez, 2004. "On Quantity Competition and Transmission Constraints in Electricity Market," Econometric Society 2004 Latin American Meetings 98, Econometric Society.
    5. Guido Pepermans & Bert Willems, 2004. "Ramsey Pricing in a Congested Network with Market Power in Generation: A Numerical Illustration for Belgium," Energy, Transport and Environment Working Papers Series ete0408, KU Leuven, Department of Economics - Research Group Energy, Transport and Environment.

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