Emergence of capacity withholding: an agent-based simulation of a double price cap electricity market

This study analyses a double price cap electricity market using agent-based simulation and investigates the emergence of capacity withholding, the tacit collusion behind it and its effects on market outcomes. In the context of the infinitely repeated game paradigm, the authors try to demonstrate the link between market design and tacit collusion that allows firms to behave strategically, resulting in a deterioration of economic efficiency. An optimal control problem is embedded in the supply function equilibrium (SFE) modelling framework. A feature of this method is to provide firms with a tool that is capable of bidding supply curves with vertical segments. They are then prepared to deal with slope constraints imposed by the SFE modelling. A simulation using the generation portfolio of the Iranian electricity industry illuminates the nature of tacit collusion and capacity withholding.