Competition in cascades

Rodrigo Menon Simões Moita and Daniel Monte

No 456, Textos para discussão from FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil)

Abstract: Hydroelectric generation is the main source of energy production in many countries. When firms operate in the same river, or in cascades, the output of an upstream firm is the input of its downstream rival. We build a dynamic stochastic duopoly model of competition in cascades and show that the decentralized market is efficient at the critical times when rain is infrequent, but inefficient when rain is more frequent. Market power is an issue when peak prices are sufficiently higher than off-peak prices: Upstream firms delay production in off-peak times, limiting their rival downstream generators' production in peak times.

Date: 2017
New Economics Papers: this item is included in nep-com and nep-ene
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