Fast computation of equilibrium market outcomes considering tacit collusion

Abstract

While well established economic theories related to dynamic games and tacit collusion exist in game theoretic and industrial organization literature, there have been relatively few analyses through the equilibrium modeling approach (as opposed to empirical or co-evolutionary approaches) to analyze collusive bidding behavior of generating companies (Gencos) in electricity markets. Moreover, existing techniques may be prone to several challenging computational issues. Therefore, this paper presents a computationally fast iterative scheme to find the equilibrium outcomes of an electricity market where the Gencos supply power in blocks of specified sizes at an offered price and can engage in tacit collusion. Several case studies demonstrate important features of such a market and the results are compared with the case when Gencos game without tacit collusion.