Demand

Althoughingeneralallsupplierswillbenetfromraisingtheirprices,given

asmallenoughmarketsharemaybenetfromloweringtheirlowestbid,be

itnotacceptedoronlypartiallyaccepted,inordertounderbidacompetitor

andthus replacethecompetitor'ssaleswithhisown.

Therecan,however,neverbeanoptimalstrategyinthecommoninterests

ofallsupplierstolowerthepricesinordertoexpandthemarket,giventhe

steepformofthedemandcurve.

1

Ascanbeseeningure9.3whichshows

theSwedish market, in theearly morning of Monday, February 10, 2003,

selling more will always reduce the total income from sales. The curves

showthetotalincomefromtheSwedish marketwhendierentvolumesof

electricityaresoldatthemarketbySwedishproducers. Theuppercurveis

whenthereisnocheapforeignimportandthelowercurveiswhenforeign

incomepours into the Swedish market causing lowerprices. However, in

bothcases,theincomewill alwaysdiminishwhen moreis soldandat the

sametime, costwill increase,sothetotalprotwilldropevenfaster than

isdemonstrated in thegure. Theequilibriasales arebetween20and 25

GWh andyield farless protto powergeneratorsthanif nocompetition

wastaking placeinSweden.

Figure 9.4showsthedemand curveof theFinnishmarket. Ifthepriceis

at `Price1',the totalincomefrom sales onthemarket willbethe sizeof

boxesA + B. However,if the priceis reduced to `Price2', the the total

incomebecomesA+C.UnderallcircumstancesboxCseemstobesmaller

thanboxB,andthusthetotalincomedropswithlowerprices. Inaddition,

thetotalcostishigherat`Price2'than`Price1',ensuringthefollyoflow

pricesfortheproducers.

Lowering prices to just under the highest accepted bid of a competitor

can be an optimal strategy when there are strict limitations on how the

supply curvemay be manipulated,as increasingthe pricessuciently to

prot more, may not be legal. Consequently the limitations to the

be-haviorof playerscontribute tothe complexityof thecalculations,instead

ofsimplifyingthem.

Inanormalmarkettherecanbetwomotivesforloweringpricesandonefor

increasingprices. Motivesforloweringpricesare: togainmarketshareand

to increasethesize of themarket. Of these, onlythe formerseemsto be

validontheelectricitymarket,duetoinelasticdemand. Andthemotivefor

increasingthepricescanonlybetoincreaseprot,despitealowermarket

1

With the possible exceptionof eastern Denmarkinextreme cases, asimportcan

0 1 2 3 4 5 6

Income when full import Income when no import

Maximum import to Sweden

Equilibrium when no import Equilibrium when full import

Figure9.3: Totalhourlyincomefromsalesin Sweden

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2

shareandasmallermarket.Havingthuslimitedthefactorsthatinuence

theoptimalstrategyofeachplayer,theproblemshould simpler.

However,asallelectricityproducersincertainareas(hopefully)donotact

in unison to provide themselveswith amonopolistic prot,but are likely

to compete, the strategy of raising prices or withholding production for

players,especially those with smallmarket share, isnot necessarily

prof-itable. Thisiswhythereisusuallysomecompetition,evenonmarketswith

few competitors, although the competition may sometimes seem limited.

MonopolyisusuallynotaNashequilibriumunlesswithonlyoneplayer.

Chapter 10

Market power on Nord

Pool's spot market

10.1 Who could be using market power?

Market power has its price. When someone exercises market power, he

does so in order to increase prices, but at the cost of sales. Thus, the

useof market powerinvolvessacrices. Inorder forthese sacricesto be

worthwhiletheeortandifprotistobeincreased,enoughmarketshare,

ormerelysales,mustremaintoovercomethesalesloss.

∆y × (x + ∆x) + y × ∆x +

Z _x+∆x

x S (x) dx ≥ 0

^(10.1)

In the above formula,

x

^and

y

respectively are the actual volume sold and theprice, before the useof market powerand

S (x)

^{is thesupply or}

productioncostfunction.

∆x

^and

∆y

^{arethedierenceinsales andprice}

when market power is used.

∆x

^{would be negative as less is sold, but}

∆y

^{positive asthepricewill rise. Therst component ofthe equationis}

the increased revenue due to higher prices,the second component is lost

revenue due to less sales, and the third component, the integral, is the

saving in production cost due to less sales. If the sum of these items is

forthe playerin question. In gure9.4the incomepartis explainedand

equation10.1mayberewrittenasfollows:

area

B −

^area

C +

^{savingofproductioncost}

≥ 0

^(10.2)

Asy,

∆y

^and

∆x

^{willbethesameforallplayers,thesizeof}

x

^{willdetermine}

forwhichplayerswillberewardedbytheuseofmarketpower.

To be able to use market power, the players must be able to inuence

prices. Inordertodoso,

∆x

^{mustbelargeenough. Sometimesthehighest}

acceptedbidislargeandonlypartiallyaccepted. Thus,

∆x

^mustbelarger

thanthe unacceptedpartof thehighestacceptedbid aswell asless than

theprevioussales

x

^.

Theconclusionis thatonly bigproducersare likelyto benet fromusing

marketpower.

In document IMM YGBY2003ESAESRETR.2003 46 (Sider 70-76)