Market Power in Power Markets: Game Theory vs. Agent-Based Approach

Abstract

Game theory and Agent-Based Economics approaches have been used to study imperfect competition in electricity markets. In this paper these two approaches are firstly described and compared using a simple text book example. Simulations show that the two approaches converge to the same outcome when unique Nash equilibrium exists and assumptions in the game theory approach are realistic. Finally, a 3 Latin American countries' power market (Mercado Electrico Andino) is studied. A simple benefits analysis of new interconnection capacity for this regional market shows the importance of proper assumptions and the complementarities of both approaches.