Tacit Collusion in Electricity Markets with Uncertain
Published online: 18 August 2015
Ó Springer Science+Business Media New York 2015
Abstract In this paper we model wholesale electricity markets as inﬁnitely
repeated games that are played under demand uncertainty. We examine the uniform-
price auction and show that symmetric bidding at the price cap constitutes the
optimal collusive equilibrium under perfectly inelastic demand in the duopoly and
oligopoly models. We further extend our analysis to study the impact of price-
responsive demand and cost-asymmetry on the collusive equilibrium. The main
implication of our analysis is the importance of a vigilant energy regulatory
authority to the success of liberalized electricity markets.
Keywords Inﬁnitely repeated games Á Nash equilibrium Á Electricity auctions Á
Daily repetition of electricity auctions gives electricity-generating ﬁrms the
incentive to engage in implicit collusion. Tacitly colluding allows ﬁrms to raise
prices and receive greater proﬁts than those that are obtainable in the stage-game
Nash equilibrium. A few works to date have modeled electricity auctions as
inﬁnitely repeated games,
but only under demand certainty (i.e. ﬁrms face known
demand functions when submitting their bids). Those that do mention uncertainty
assume its resolution before market participants submit their bids.
& Richard Benjamin
Round Table Group, 1074 Springhill Ct., Gambrills, MD 21054, USA
See Fabra (2003), Fabra and Toro (2005), and Dechenaux and Kovenock (2007).
See, e.g., Fabra (2003).
Rev Ind Organ (2016) 48:69–93