Collusive Behavior in a Network Constrained Market

Market power is the ability of a firm to raise the price of a product above its fair and competitive level. Locational market power is a special kind of market power that arises when locational advantage allows suppliers to act non-competitively. For example, in case of the electricity market, binding transmission constraints can prevent adequate competition. Transmission constraints can create isolated geographic markets where generators can have local monopoly. Such constraints may occur naturally or by manipulation of transmission facilities or generator dispatch patterns [4][7]. Generators can exert monopoly power over the local load if network topology allows no other suppliers to serve the load. Strategically placed generators or phase shifters can be operated to deliberately congest lines that are needed by the competitors [2][1]. In this paper, we focus on the issue of locational market power arising out of transmission constraints in the electricity market. We propose a quantifiable definition of locational market power and conduct a detailed analysis of the topological cause of the market power. This study addresses questions of the following kind: (i) Does larger generation capacity imply higher market power? (ii) Can strategic collusive behavior by the generators result in higher market power?