Empirical dynamic oligopoly behavior analysis in electricity markets

Abstract

In recent electricity markets, the market structure is more similar to oligopoly market than perfectly competitive market. As a result, market participants can increase profits through exercising strategic bidding, or it is more known as exercising market power. Recently, the concept of conjectural variation and its application to strategic bidding and market power has been introduced in oligopoly electricity market. In this paper, the method for empirically estimating the conjectural variations of firms is proposed. Through the estimates of conjectural variation of generation companies (Gencos), the market behaviors of Gencos can be analyzed. Hence, the system regulator of electricity market may recognize and curb the market power by examining the market behaviors of Gencos. On the other hand, market participants can also analyze the behavior of their rivals and make the optimal decision accordingly. An empirically investigation about dynamic market behavior of firms in an actual electricity market is presented. The null hypothesis and likelihood ratio test will be utilized to analyze the dynamic behavior of firms.