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A Market Power Model with Strategic Interaction in Electricity Networks

Abstract:
When transmission constraints limit the flow of power in an electric network, there are likely to be strong interaction effects across different parts of the system. A model of imperfect competition with strategic interactions in an electricity transmission network illustrates a possible exercise of market power that differs from the usual analysis of imperfect competition in more familiar product markets. Large firms could exercise horizontal market power by increasing their own production, lowering some prices, and exploiting the necessary feasibility constraints in the network to foreclose competition from others. This behavior depends on the special properties of electric networks, and reinforces the need for market analysis with more realistic network models.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Transmission and Network Management; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes: Q48: Energy: Government Policy, Q41: Energy: Demand and Supply; Prices, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, D42: Market Structure, Pricing, and Design: Monopoly, D43: Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, L13: Oligopoly and Other Imperfect Markets, R41: Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise

Keywords: Electricity networks, Market power, Strategic interaction

DOI: 10.5547/ISSN0195-6574-EJ-Vol18-No4-5


Published in Volume18, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.