Incentives and Coordination in Vertically Related Energy Markets

Abstract

We present an agent-based model of a multi-tier energy market including gas shippers, electricity generators and retailers. We show how reward interdependence between strategic business units within a vertically integrated firm can increase its profits in oligopolistic energy markets. The effects are shown to be distinct from those of the raising rivals' costs model. In our case, higher prices relate to the nature of energy markets, which facilitate the emergence of financial netback effects.

Keywords: Agent-based modeling, energy markets, reward interdependence

JEL Classification: C63, L22, L97