Capacity Utilization in Electricity Market Behavior: an Experimental Analysis

This paper describes a laboratory experiment of electricity markets to study the effect of variable capacity utilization over market dynamics. Previous experiments have left out a potential source of cyclical behavior by assuming full capacity utilization. We run 12 experimental markets of the power generation sector, involving two treatments: a first treatment with fixed (full) capacity utilization where subjects make investment decisions, and a second treatment where subjects make both investment and capacity utilization decisions. Visual inspections, basic statistics and simulation tests run with decision rules estimated from experimental data show that the markets run under full capacity utilization present a cyclical behavior in market development. Conversely, such tests show a noncyclical market development for the markets run under variable capacity utilization, suggesting that varying capacity utilization favors stability rather than a cyclical behavior.