Monopolistic Competition in Electricity Networks

Abstract

This paper models an electricity market with generators and customers located on a network. Generators bid cost functions and are dispatched by a system operator that minimizes the system cost while considering network constraints. We prove the existence of equilibrium and show that transmission constraints render the market imperfectly competitive. It is shown that competition among generators is similar to the interaction among firms in a monopolistic competition setting. A lower bound for market prices is obtained. Our results provide insights not captured by previous models. At a methodological level, we generalize standard oligopoly theory tools by using stability analysis.

Keywords: electricity markets, networks, existence, market power, stability analysis, oligopoly theory

JEL Classification: C61, D43, L94