Market power analysis in the Italian electricity market using a supply function equilibrium model

Market power is one of the main concerns in the Italian electricity market. Transmission constraints and highly concentrated ownership structure in the market have been allowing firms to exercise market power and raise electricity prices above marginal cost. This paper presents a supply function equilibrium (SFE) model for analyzing the exercise of potential market power in the Italian electricity market. A coevolutionary genetic algorithm is used to calculate the oligopolistic price equilibria of the SFE model, while considering the transmission constraints in the network using a 3 area approximation of the Italian grid. Demand is assumed to be perfectly inelastic.