Monopolistic Competition in Electricity Networks with Resistance Losses∗

We consider a pool type electricity market in which generators bid prices in a sealed bid form and are dispatched by an independent system operator (ISO). In our model, demand is inelastic and the ISO allocates production to minimize the system costs while considering the transmission constraints. In a departure from received literature, the model incorporates explicit description of the network details. The analysis shows that losses along transmission lines render the market imperfectly competitive. Indeed, it is shown that competition among generators is qualitatively similar to the interaction among firms in a monopolistic competition setting. A lower bound for market prices is derived and it is shown that the costumers’ cost of oligopolistic pricing is strictly positive. At a methodological level, we generalize standard oligopoly theory tools. ∗We would like to thank to Soledad Arellano, Sophie Bade, Ross Baldick, Alex Galetovic, Aldo González, Rodrigo Palma, Robert Wilson, and several seminar participants for useful suggestions. We particularly thank two anonymous referees for their detailed review and suggestions. Anne-Lise Thouroud provided helpful research assistance. This work was partially supported by ICM Complex Engineering Systems. †Department of Economics, Stanford University. 579 Serra Mall, Landau Economics Building, Stanford, CA 94305. Email: [email protected]. ‡Depto de Ingenieŕıa Matemática and Centro de Modelamiento Matemático, Universidad de Chile. Blanco Encalada 2120 7o. piso, Casilla 170/3 Santiago de Chile. Email: [email protected]