Network Models of Spatial Oligopoly with an Application to Deregulation of Electricity Generation

Abstract

Because of the existence of transmission costs and significant scale economies in power production, deregulation of electricity generation would lead to spatial oligopolistic markets. This paper uses linear programs to obtain short-run spatial price equilibria for a deregulated bulk power market in upstate New York. These models, unlike most previous models of imperfect competition, capture spatial variations in production costs and demand functions. We present two models. One calculates a Nash-Bertrand equilibrium, in which each firm believes that rivals will not react to price changes. This equilibrium represents the most intense level of competition to be expected. The other model yields limit prices that are designed to discourage new firms from entering the market.