Competitive Market Equilibrium Research Articles

Welfare optimal reliability and reserve provision in electricity markets with increasing shares of renewable energy sources

We develop an analytical model to derive the competitive market equilibrium for electricity spot and reserve markets under uncertain demand and renewable electricity generation. The first-best market equilibrium of the model resembles the result of a centralized co-optimization of the markets involved. We then derive the welfare-optimal provision of reserves. At first-best, cost of reserve capacity is balanced against expected cost of outages. Comparative statics and a numerical application based on German secondary reserve provision imply an increase of reserve provision with a growing share of renewable generation. Furthermore, a growing share of renewable generation decreases the level of reliability as measured in energy not served since required reserves to balance higher expected deviations will be more expensive, resulting in a trade-off between higher reserve costs and costs of energy not served.

Ride-sourcing Service Pricing and Cancellation Penalty under Service Arrival Time Uncertainty

This study investigates ride-sourcing service pricing and order cancellation penalty in a duopoly market under service arrival time uncertainty. Order cancellation is wasteful to the service provider and society as a whole due to the incurred unproductive congestion and therefore, should be minimized either by penalty or regulation. Certain cancellations are inevitable, due to customer trip changes; others, however, arise from ordering from two service providers, necessitating the need for cancellation. We model the service arrival time perception via an inhomogeneous Poisson process and derive the cancellation behavior in a stochastic manner. A game-theoretic approach is then developed to formulate the competitive market equilibrium. For comparison, we also study the monopoly market as a benchmark. The monopoly market is found to be better in terms of order cancellations and service waiting times, but worse in trip fares for large markets. Based on these results, we propose possible regulatory interventions to reduce wasteful order cancellations.

Dynamic Risked Equilibrium

We study a competitive partial equilibrium in markets where risk-averse agents solve multistage stochastic optimization problems formulated in scenario trees. The agents trade a commodity that is produced from an uncertain supply of resources. Both resources and the commodity can be stored for later consumption. Several examples of a multistage risked equilibrium are outlined, including aspects of battery and hydroelectric storage in electricity markets, distributed ownership of competing technologies relying on shared resources, and aspects of water control and pricing. The agents are assumed to have nested coherent risk measures based on one-step risk measures with polyhedral risk sets that have a nonempty intersection over agents. Agents can trade risk in a complete market of Arrow-Debreu securities. In this setting, we define a risk-trading competitive market equilibrium and establish two welfare theorems. Competitive equilibrium will yield a social optimum (with a suitably defined social risk measure) when agents have strictly monotone one-step risk measures. Conversely, a social optimum with an appropriately chosen risk measure will yield a risk-trading competitive market equilibrium when all agents have strictly monotone risk measures. The paper also demonstrates versions of these theorems when risk measures are not strictly monotone.

Seller-Pricing Frictions and Platform Remedies

Many platform sellers struggle to set prices when facing complex market conditions. These difficulties motivate the platform to offer (centralized) algorithmic pricing as a remedy, yet at the expense of sellers’ private information. This paper studies the extent of seller-pricing frictions and explores underlying mechanisms. I use granular data on Airbnb sellers’ demand and pricing strategies to pin down the extent of pricing frictions. Leveraging a price-setting interface change, I disentangle two different mechanisms –sellers’ price-adjustment costs and their use of suboptimal heuristics– and show both are essential drivers of the frictions, but with distinct implications on the optimal platform remedy. I develop a scalable model to characterize the competitive market equilibrium, separately quantify sellers’ price-adjustment costs and use of heuristics, and simulate alternative platform remedies. My results show that a centralized pricing algorithm will distort market outcomes if it cannot fully account for sellers’ private information, suggesting that the platform should let sellers set prices even if their decisions are imperfect. An alternative remedy is to improve the seller-side interface, and I show that reducing sellers’ price-adjustment costs alone can alleviate up to 43% of the total profit loss from frictions.

Investigation of construction waste recycling decisions by considering consumers’ quality perceptions

Building material enterprises (BMEs) and waste recycling enterprises (WREs) are two critical stakeholders in construction waste recycling, and their decisions toward waste recycling are influential to development of waste recycling market. However, the present literature fails to consider consumers’ quality perceptions of recycled materials when investigating stakeholder decisions in the market, which significantly affects understanding of stakeholder decisions on waste recycling. To address the research gap, this study investigates from a theoretical perspective the optimal strategies of the BME and the WRE by considering consumers’ quality perceptions toward recycled materials. The game theory is employed to develop models and analyze stakeholder decisions in the context of different construction waste (CW) recycling scenarios. It is found that the consideration of consumers’ quality perceptions toward recycled materials shapes three CW recycling scenarios (i.e., business stripping mode, business monopoly mode, and business cooperation mode) in the waste recycling markets. When there is a demand for recycled materials, the BME should take good use of its labor and capital advantages to actively develop the waste recycling market for higher profits. However, when there are already independent WREs, the BME should perform waste recycling business jointly with the WRE. In addition, there exists stable competitive market equilibrium, depending on low consumer quality perception of recycled materials produced by the BME and small consumer quality perception disparity between recycled materials provided by the two enterprise groups. Under the circumstance, the BME and the WRE can achieve a win-win situation for gaining profits. This theoretical study contributes to a new perspective (i.e., consumers’ quality perceptions) for better understanding decisions of major stakeholders (i.e., the BME and the WRE) on CW recycling. In addition, the study for the first time introduces the game theory into explaining CW recycling, which may enhance the effectiveness of policies aiming at promoting CW recycling practices.

Electricity market equilibrium under information asymmetry

We study a competitive electricity market equilibrium with two trading stages, day-ahead and real-time. The welfare of each market agent is exposed to uncertainty (here from renewable energy production), while agent information on the probability distribution of this uncertainty is not identical at the day-ahead stage. We show a high sensitivity of the equilibrium solution to the level of information asymmetry and demonstrate economic, operational, and computational value for the system stemming from potential information sharing.

Informational Efficiency with Trading Constraints: A Characterization

Given a market with a price process S populated by heterogeneous traders with differential information, beliefs, and trading constraints, let the smallest information set containing all of the traders’ information be denoted F. This market is defined to be informationally efficient (Fama [2]) with respect to an information set G ⊆ F if the price process S arises as an outcome of a competitive market equilibrium. We provide a characterization of such an informationally efficient market. Roughly stated, a market is informationally efficient with respect to G if and only if there exists an equivalent probability measure that makes the price process normalized by the value of a money market account a martingale with respect to G if and only if the market satisfies no free lunch with vanishing risk (NFLVR) and no dominance (ND) with respect G. This characterization subsumes the economies and characterizations contained in the more restrictive market settings of Jarrow and Larsson [7, 8].

Financial Literacy and Precautionary Insurance

We study insurance markets with individuals that have limited financial literacy. In our model, complexity of insurance contracts causes individuals to be uncertain about insurance payouts. As a result, a trade-off between second-order (risk aversion) and third-order (prudence) risk preferences drives insurance demand. Very prudent individuals desire more insurance coverage when contract complexity increases, while the effect is reversed for less prudent individuals. We characterize the competitive market equilibrium with complex contracts when firms can exert costly effort to reduce complexity. Based on the equilibrium analysis, we propose a monetary measure for the welfare cost of financial illiteracy and show that it is mainly driven by risk aversion. We conclude with a discussion about implications for policy interventions and consumer protection.

Strict fairness of equilibria in asymmetric information economies and mixed markets

We investigate the fairness property of equal-division competitive market equilibria (CME) in asymmetric information economies with a space of agents that may contain non-negligible (large) traders. We first propose an extension to our framework of the notion of strict fairness due to Zhou (J Econ Theory 57:158–175, 1992). We prove that once agents are asymmetrically informed, any equal-division CME allocation is strictly fair, but a strictly fair allocation might not be supported by an equilibrium price. Then, we investigate the role of large traders and we provide two sufficient conditions under which, in the case of complete information economies, a redistribution of resources is strictly fair if and only if it results from a competitive mechanism.

Information Induced Liquidity Crises

In a general equilibrium economy with uninsurable aggregate liquidity shocks, we show that public information may trigger allocative inefficiency and liquidity crises. Entrepreneurs do not internalize the negative impact of their investment decisions on the equilibrium risk of liquidity shortage. A more informative public signal decreases the risk of a liquidity shock, but increases the risk of capital rationing conditional on a liquidity shock. In equilibrium, information quality has a non-monotonic effect on expected returns on investment and social welfare. An increase in the quality of public information has redistributive effects on welfare as entrepreneurs gain and financiers lose. Investment restrictions and targeted disclosure of information achieve constrained efficiency as competitive market equilibrium.

Welfare Optimal Reliability and Reserve Provision in Electricity Markets with Increasing Shares of Renewable Energy Sources

We develop an analytical model to derive the competitive market equilibrium for electricity spot and reserve markets under stochastic demand and uncertain renewable electricity generation. We then derive the welfare-optimal provision of reserves. At rst-best, cost of reserve capacity is balanced against expected cost of outages. The rst-best market equilibrium of the model implies an increase of reserve provision with a growing share of renewable generation. Furthermore, a growing share of renewable generation decreases the level of reliability as measured in energy not served. Additionally, required reserves to balance higher expected deviations will be more expensive, resulting in a trade-o between higher reserve costs and costs of energy not served.

Group Analytics in Adam Smith’s Work

The link between occupation and character began with David Hume and was extended by Adam Smith in service to their attack on the doctrine of innate national character. A worker’s awareness of the relative approbative rewards to occupation is central to Smith’s competitive labor market equilibrium. When the division of labor is extended by growth, the variance of character increases. With this insight Smith was able to offer a race-blind theory of civilization, something that escaped even Hume. Nineteenth century anthropological focus on the variance of character can be seen as a racialization of Smith’s work.

Competitive Market Achieves the Greatest Happiness of the Minimum Number

This note studies homogenous good markets, assuming that each buyer/seller has a unit demand/supply and that side payments beyond buyer-seller pairs are prohibited. We show that the quantity of good traded under the competitive market equilibrium is minimum among all Pareto efficient and individually rational allocations, provided that the definition of Pareto efficiency incorporates the presumption of no side payment. Our finding may suggest that the competitive market results in the most unequal allocation, since the number of buyers or sellers left-behind from profitable trades is maximized. Conversely, unless a demand or supply curve is completely flat, there always exists a Pareto efficient allocation that entails strictly larger number of profitable trades than the equilibrium quantity. Implications to positive analysis are also discussed.

Equilibrium, uncertainty and risk in hydro-thermal electricity systems

The correspondence of competitive partial equilibrium with a social optimum is well documented in the welfare theorems of economics. These theorems can be applied to single-period electricity pool auctions in which price-taking agents maximize profits at competitive prices, and extend naturally to standard models with locational marginal prices. In hydro-thermal markets where the auctions are repeated over many periods, agents seek to optimize their current and future profit accounting for future prices that depend on uncertain inflows. This makes the agent problems multistage stochastic optimization models, but perfectly competitive partial equilibrium still corresponds to a social optimum when all agents are risk neutral and share common knowledge of the probability distribution governing future inflows. The situation is complicated when agents are risk averse. In this setting we show under mild conditions that a social optimum corresponds to a competitive market equilibrium if agents have time-consistent dynamic coherent risk measures and there are enough traded market instruments to hedge inflow uncertainty. We illustrate some of the consequences of risk aversion on market outcomes using a simple two-stage competitive equilibrium model with three agents.

Expected Duration of Competitive Advantage Due to Technology Adoption

The objective of this study is to provide a framework for predicting expected duration of competitive advantage due to emerging technology adoption, and suggest a process for generating technology specific predictions. Our framework integrates elements from the technology adoption (diffusion) cycle, hype cycles of emerging technologies, and the resource based view conceptualization of number of firms associated with a perfectly competitive market equilibrium. We demonstrate the empirical estimation of expected duration of competitive advantage for two technologies (cloud computing and ERP). For cloud computing estimation, we use four sources of proxies for expectations: Google Trends for web search interest, LexisNexis for news stories on cloud computing, Gartner Hype Cycles for emerging technologies, and number of book titles on cloud computing. All four sources produce comparable results. For ERP, we rely on prior literature to show that our predictions are consistent with evidence from empirical studies.

Why do restaurants serve lunch cheaper than dinner?

The article explores a question why restaurants serve lunch meals cheaper than dinner meals. Departing from traditional demand curves derived from utility functions, the article uses a distribution function of reservation prices of patrons to represent a market demand curve. Given identical convex market demand curves in two distinct markets isolated by the time, restaurants exploit the convexity of the market demand curves by setting two prices whose average price is higher than the competitive market equilibrium price. This exploitation opportunity induces restaurants to adopt oligopolistic pricing behaviours.

Does SkinninntheeGame Affect Security Performance? Evidence from the Conduit CMBS Market

We document that the amount of first-loss security retention in the conduit CMBS market has a significant impact on the probability that more senior tranches ultimately default. In particular, we demonstrate that an increase in the amount of first loss security retention is correlated with better security performance, after controlling for information available at issue. We then identify plausibly exogenous variation in the amount of first-loss security retention, relying on the greater ability of larger first loss investors to sell these positions into CRE CDOs given the need for large pools of collateral. Using this variation as an instrument, we measure a causal link between retention and performance. Further, we demonstrate that the risk associated with this agency problem was not priced at origination, as the interest rate on senior securities is not correlated with the amount of retention. Together, the evidence is consistent with the hypothesis that first-loss security retention is not supported by competitive market equilibrium and suggests that regulation of retention could improve outcomes.

Horizontalism and Idealism in Socialist Imagination: An Appraisal of the Participatory Economy

The model of the “Participatory Economy,” developed by Michael Albert and Robin Hahnel over the last 30 years, has attracted attention as a serious answer to “TINA” — “There Is No Alternative” (to capitalism) — and as a conception of socialism that claims superiority over proposals for central planning, “market socialism,” and “negotiated coordination.” The 2012 publication of Hahnel's Of the People, By the People: The Case for a Participatory Economy provides an opportunity to examine this conception critically and systematically. Despite its many insights and contributions, the Albert–Hahnel model suffers from two crucial problems: its commitment to an abstractly speculative approach to the design of social institutions, and a limiting fear of authority and hierarchy that has clear roots in classical anarchist thinking. This latter feature results in a model with an uncanny resemblance to Walrasian competitive market equilibrium — despite its progenitors' programmatic denial of this connection.

Equilibrium in Wholesale Energy Markets: Perturbation Analysis in the Presence of Renewables

One of the main challenges in the emerging smart grid is the integration of renewable energy resources (RER). The latter introduces both intermittency and uncertainty into the grid, both of which can affect the underlying energy market. An interesting concept that is being explored for mitigating the integration cost of RERs is demand response (DR). Beginning with an overall model of the major market participants with RER and DR, together with the constraints of transmission and generation, we analyze the energy market in this paper and derive conditions for existence and uniqueness of the competitive market equilibrium using standard Karush-Kuhn-Tucker (KKT) criteria. The effect of wind uncertainty on the competitive market equilibrium is then quantified. Perturbation analysis methods are used to compare the equilibria in the nominal and perturbed markets. This analysis is used to quantify the effect of RERs uncertainty and its possible mitigation using DR. Finally numerical studies are reported using an IEEE 30-bus to validate the theoretical results.

Dynamic Spectrum Management with Competitive Market Equilibrium

In an effort to improve the efficiency of spectrum usage, the cognitive radio (CR) [1] technology was proposed, bringing the possibility of dynamic spectrum management (DSM) [2]. Generally speaking, the multiuser communication systems in the background of CR are interference-limited. Power control is one of the central issues in the design of these systems. This problem can be modeled as a competitive market equilibrium (CME) system. In this paper, we reveal the differences between the CME problem and the standard Linear Complementary Problem (LCP), and then derive the closed form solution to a simplified CME problem. We also propose a hybrid algorithm as an alternative to the tâtonnement process [3] in case the latter diverges. When the convergence conditions are not tenable, it is shown that the proposed algorithm can reduce the processing delay compared with the tâtonnement process.