A Step Toward Stable Tacit Collusion in Electricity Market

In this paper, we examine double price cap electricity market from the viewpoint of non-pivotal firms. Collusive scarcity is developed by abolishing the widespread assumption that non-pivotal firms have not enjoyed a strategic behavior of capacity withholding. In the context of the infinitely repeated game paradigm, the firms are presented with reinforcement learning and punishment policy framework, in that they attempt to learn how to tune the slope of bidding decisions and when to declare a collusive fictitious binding capacity constraint. The resulting bidding decisions explain the rationale of collusion behind capacity withholding and show to what extent non-pivotal firms can maintain stable collusive outcomes with punishment policy framework. A simulation using the generation portfolio of the Iranian electricity industry sheds light on why non-pivotal firms are capable of capacity withholding and how they maintain their collusive behavior by exerting punishment policy.