Monday, April 27, 2020

Strategic Reneging in Sequential Imperfect Markets

By: David BENATIA (CREST (UMR 9194), ENSAE, Institut Polytechnique de Paris.); Etienne BILLETTE de VILLEMEUR (LEM-CNRS (UMR 9221), Université de Lille.)
Abstract: This paper investigates the incentives to manipulate sequential markets by strategically reneging on forward commitments. We first study the behavior of a monopolist in a two-period model with demand uncertainty. Our results deliver guidance for identifying manipulations and evaluating its market impacts. We then test the model's predictions using occurrences of reneging on long-term commitments in Alberta's electricity market. We implement a machine learning approach to identify and evaluate manipulations. We find that a dominant supplier increased its revenues by $35 million during the winter of 2010-11, causing Alberta's electricity procurement costs to increase by above $330 million (20%).

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