Limit Pricing and Entry Game of Renewable Energy Firms into the Energy Sector

25 Pages Posted: 2 Sep 2021

See all articles by Willi Semmler

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Giovanni Di Bartolomeo

Sapienza University of Rome, Department of Economics and Law

Behnaz Minooei Fard

Cà Foscari University of Venice, Department of Economics

Joao Braga

New School for Social Research - Department of Economics

Date Written: July 23, 2021

Abstract

Governments attempt to provide the energy sector with incentives to replace old technologies with new ones based on renewable energy as the most effective way to combat climate change. Yet, in the energy sector prevail fossil fuel incumbents that inhibit renewable energy entrants. Our paper provides a game-theoretic stylization of competition between those two types of firms. Incumbents set prices and entrants respond with quantity adjustments. In the context of a dynamic limit pricing model, we study the entry dynamics in a market in which the dominant firms (fossil fuel energy suppliers) face the entry of a group of competitive fringe firms (renewable energy suppliers) when the dominant firms have easier access to financial markets, but the fringe firms finance their expansion with internal finance. We also investigate the effect of the public support of renewable energy firms through subsidies. Our model is built on Judd and Peterson (1986, JET), but our solutions are obtained through a non-linear model predictive control algorithm. By this technique, we can predict the outcome of the competition between incumbents and entrants and the impact of financial and fiscal policies considering moving-horizon strategies.

Keywords: Global warming, renewable energy, limit pricing, strategic entry game, and non-linear model predictive control.

Suggested Citation

Semmler, Willi and Di Bartolomeo, Giovanni and Minooei Fard, Behnaz and Braga, Joao, Limit Pricing and Entry Game of Renewable Energy Firms into the Energy Sector (July 23, 2021). Available at SSRN: https://ssrn.com/abstract=3915079 or http://dx.doi.org/10.2139/ssrn.3915079

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universitätsstraße 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Giovanni Di Bartolomeo

Sapienza University of Rome, Department of Economics and Law ( email )

via Castro del Laurenziano 9
Roma, IA Rome 00191
Italy

Behnaz Minooei Fard

Cà Foscari University of Venice, Department of Economics ( email )

Venice
Italy

Joao Braga (Contact Author)

New School for Social Research - Department of Economics ( email )

Room 1116
6 East 16th Street
New York, NY 10003
United States

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