In-Koo Cho and Sean Meyn

In 2007, prices for power reached $10,000 Aus. in Victoria, many times greater than the ususal value near $50. At the same time, prices crashed to a negative vlaue in Tasmania (- $1,000 Aus).

Similar high prices are seen today in European and Canadian markets (see plenary lecture, Stochastic Processes and Applications 2007, Paris France.)

Abstract:

This paper examines a dynamic general equilibrium model with supply friction. With or without friction, the competitive equilibrium is efficient. Without friction, the market price is completely determined by the marginal production cost and the consumers gain positive surplus from trading. If friction is present, no matter how small, then the market price fluctuates between zero and the ``choke-up'' price, without any tendency to converge to the marginal production cost, exhibiting considerable volatility. The gains from trading can deviate significantly from the prediction of the static model in the efficient market outcome. Also considered is a monopolistic market model in which a single firm determines market prices as a function of time. The market outcome is identical in the case of a continuum of consumers. In a model with a single consumer the market prices increase, and the supplier extracts the entire gain from trading.

Reference:

@unpublished{chomey06b,
Author = {Cho, I.-K. and Meyn, S. P.},
Note = {{Under revision for J. Theo. Economics. Preliminary version to appear, 46th IEEE Conference on Decision and Control}},
Title = {Efficiency and Marginal Cost Pricing in Dynamic Competitive Markets},
Year = {2006}}