Tacit Collusion in Pool-Based Electricity Markets with a Demand Shock

Abstract

According to the repeated-game theory, the continual interactions of electricity producers can increase the probability of collusion between these firms. As a result, the market equilibrium will be established based on tacit collusion. In this paper, the model of collusion in a power pool market is presented in the form of a mathematical program with equilibrium constraint (MPEC). This program takes into account the transmission network and production capacity constraints of the power plant, and the uncertainty property caused by the demand shock. The uncertainty is shown by a random variable in this scenario. Assuming that the probability density function of the random variable is general knowledge for all stakeholders of the electricity market, and the risk tolerance is zero, the collusion resulting from the strategy due to uncertainty is shown as the market equilibrium. Finally, it is concluded that the collusive expected profits in anticipation of a high demand market are higher than a low demand market.