A dynamic investment model for oligopolistic markets under uncertainty

Pierre-Olivier Pineau
Systems Analysis Laboratory (Finland)
École des Hautes Études Commerciales (Canada)

Pauli Murto
Systems Analysis Laboratory (Finland)

In deregulated electricity markets, the investment problem faced by producers contains high uncertainties about the future, but is also affected by other players’ actions. A dynamic stochastic oligopoly model to describe the production and investment in such a situation is developed and applied to the Finnish electricity market. The uncertainty is introduced using a stochastic variable, which in our application is the demand growth rate. The strategies of the firms thus combine investment choices and production levels under the influence of this stochastic element. The firms have nuclear, hydro and thermal capacities, but are only allowed to invest in new thermal capacity. The different load levels are taken into account by modeling base and peak load markets as separate segments, which have different demands. Although based on an open loop information structure, the model helps to understand dynamics of production, investment and market power in a medium time horizon.