A Stackelberg price leadership model with application to deregulated electricity markets

Abstract

This paper presents a Stackelberg price leadership model for simulating deregulated electricity markets consisting of one or a few large producers and a larger number of fringe producers. It is assumed that the large producer(s) would adopt oligopoly strategy using their market power while the small producers would use Bertrand-like strategy. The model is a multi-objective profit maximization program. The multi-objectives are converted into the same number of partial Lagrangian functions with power production and supply as the control variables. A set of KKT conditions is then derived considering the game strategies of the producers. Test results show that the model successfully produces a total profit that is greater than that profit from a welfare maximization model but is less than that from a collusion model. Producers who adopt Cournot strategy are better off with higher profits as compared with marginal cost pricing.