Locational Market Power in Network Constrained Markets

This paper studies the issue of locational market power of suppliers in a market that is situated on a network. Locational market power arises when locational advantage allows suppliers to act non-competitively and raise prices above competitive levels. We propose a quantifiable definition of locational market power and analyze its properties over a general network. We also conduct a detailed analysis of the topological cause of the market power for a real electrical network using network analysis tools. We show that strategic alliances among small generators with geographical advantage can lead to significant amounts of market power. In the case of inelastic demand, the collusive behavior among suppliers leads to higher incidence of locational market power. The market power is curtailed as demand becomes more responsive to price, supporting the view that efficient markets require active participation from the consumers. We also observe that if the supply is more elastic than demand then supply can override some of the effects of elastic demand.