Model of Pivotal Oligopoly Applied to Electricity Markets"
Dimitri Perekhodstev, Lester B. Lave, Seth
Electricity industry is featured by the exceptionally inelastic demand,
which has to be met by all means. Not meeting the demand may result in the
power going down for all customers, the consequences of which are very costly.
This feature leaves the participants of the electricity market much more room
to manipulate the market and exercise the market power than in any other
market. Inelastic demand is the reason why the usual measures of market
concentration do not predict the possible market behavior in the electricity
markets. Some new methods to assess the potential market power have been
applied. They use the intuitive idea that the electricity market is
concentrated and the risk of market power is very high whenever the largest
supplier in the area owns the capacity, which is more than the supply margin
during the peak hours. We provide theoretic justification for using the market
concentration indices based on the supply margin. We developed the
game-theoretic model of the uniform price auction with the capacity
constrained generators. It gives the idea on the expected market price at
different levels of demand. In particular, the model predicts that the
expected market-clearing price depends on the minimum number of firms that
need to act in concert to drive the price up. The significant market power can
be exercised even when the supply margin is about the capacity of four to five
largest generators. We propose to use the index of market concentration based
on the minimum number of firms that may constitute the pivotal group at the
given demand level.
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