Implicit collusion and individual market power in electricity markets

Wholesale electricity markets may not produce competitive outcomes, either as a result of the exercise of market power, or through problems of implicit collusion. In comparison with the great amount of attention paid to issues of market power, the problems of implicit collusion have not been extensively studied. In this paper, we use a coevolutionary approach to explore the effect of the price elasticity of demand, capacity and forward contracts on implicit collusion in a duopoly. We will demonstrate that implicit collusion has the most importance in market conditions under which there is an intermediate amount of market power. Thus markets which are either highly competitive or in which one or both of the two generators can exercise considerable market power, are also markets in which implicitly collusive outcomes are less likely to arise.