Presenting a Model to Determine the Equilibrium in an Electricity Oligopoly with Strategic Investment Decisions: a Case Study

Reza Basiri (), Mansour Abedian (), Saeed Aghasi () and Zahra Dashtaali ()
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Reza Basiri: PhD Candidate, Department of Management, Dehaghan branch, Islamic Azad University, Isfahan, Iran
Mansour Abedian: PHD, Department of Industrial Engineering, Najafabad Branch, Islamic Azad University, Najafabad, Iran
Saeed Aghasi: PHD, Department of Management, Dehaghan branch, Islamic Azad University, Isfahan, Iran
Zahra Dashtaali: PHD, Department of Management, Dehaghan branch, Islamic Azad University, Isfahan, Iran

Quarterly Journal of Applied Theories of Economics, 2024, vol. 11, issue 2, 249-280

Abstract: The purpose of this paper is to use optimization and equilibrium models to study the behavior of electricity producers in a multilateral oligopoly market with a competitive margin in which all producers have investment decisions. Modern wholesale electricity markets often have producers who exercise market power. The standard method for modeling market power in a monopoly with a competitive fringe is to use Mixed Complementarity Problems (MCPs) and conjecture variations. However, such models can lead to near-optimal behavior for monopolists. To solve this problem, we develop an equilibrium problem with equilibrium constraints to model an electricity market structure. It is modeled in the equilibrium of two types of players. Price-maker companies, which have market power, and price-taking companies, which do not have the power to impose prices on the market. The proposed model finds multiple equilibrium for firms' investment and profit decisions. The model was simulated for 2 price-setting electricity companies and 2 price-setting electricity companies in Iran. This research was done in 2022. In this article, the power companies of Isfahan and Boushehr provinces, which also have power plants, are considered as price takers, and the power companies of Khouzestan and Hormozgan provinces are considered as price takers. The presented model shows how it may be optimal for price-making companies to accept losses in some periods in order to prevent more investment of price-taking companies in the market

Keywords: price-taking: price-making; equilibrium; Oligopoly (search for similar items in EconPapers)
JEL-codes: A11 C02 C70 D43 (search for similar items in EconPapers)
Date: 2024
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