Vertically integrated firms' investments in electricity generating capacities

Abstract

We compare investments in generating capacities of an integrated monopolist with the aggregate investments of two vertically integrated competing firms. The firms invest in their capacity and fix the retail price while electricity demand is uncertain. The wholesale price is determined in a unit price auction where the firms know the level of demand when they bid their capacities. Total capacities can be larger or smaller with a duopoly than with a monopoly. If the two firms select the Pareto dominant equilibrium, then the retail price is always higher and the social welfare lower in the duopoly case.

Modeling electricity markets as two-stage capacity constrained price competition games under uncertainty

“…6 The result for ‫‬ = 1 − ܿ̃ can also be found in a revised version of [19] that recently came into our attention.…”

“…The work in [14]- [17] assumes Cournot competition in the second stage, while [5], [6] and [13] assume price competition under capacity constraints. All models, apart from [14], assume uncertain demand with a continuous demand distribution, while demand is inelastic (i.e.…”

“…These models examine how a sequence of capacity investments decisions are made under uncertain and evolving market demand. The strategic decisions of the firms are modeled using either the Cournot or elated to the present paper, theoretic models that study the strategic stage framework ( [5]- [6] and . The first stage of the model corresponds to the firms decide on how much capacity to build, while on the second stage firms compete in the spot stage game is solved by backward induction in order to find its subgame perfect equilibrium.…”

“…All models, apart from [14], assume uncertain demand with a continuous demand distribution, while demand is inelastic (i.e. vertical) only in [5] and [6]. Asymmetric firms (i.e.…”

“…It will be solved by backwards induction, thus we will first present the solution of the pricing stage, based on This is a common assumption in electricity market literature (see [5], [6]). …”