Improving firm performance in out-of-equilibrium, deregulated markets using feedback simulation models

Deregulation has reshaped the utility sector in many countries around the world. Organisations in these deregulated industries must adopt new policies which guide strategic decisions, in an uncertain and unfamiliar environment, that determine the short- and long-term fate of their companies. Traditional economic equilibrium models do not adequately address the issues facing these organisations in the shift towards deregulated market competition. Equilibrium assumptions break down in the out-of-equilibrium transition to competitive markets, and therefore different underpinning assumptions must be adopted in order to guide management in these periods. Simulation models incorporating information feedback through behavioural policies fill the void left by equilibrium models and support strategic policy analysis in out-of-equilibrium markets. As an example, we present a feedback simulation model developed to examine firm and industry level performance consequences of new generation capacity investment policies in the deregulated UK electricity sector. The model explicitly captures behavioural decision policies of boundedly rational managers and avoids equilibrium assumptions. Such models are essential to help managers evaluate the performance impact of various strategic policies in environments in which disequilibrium behaviour dominates.