Emergence of Price Divergence in a Model Short-Term Electric Power Market

TL;DR

This paper presents a minimal model of short-term electric power markets with myopic agents, showing that price divergence naturally emerges mid-session without collusion, influenced mainly by preferences and budgets.

Contribution

It introduces a simple, realistic model demonstrating spontaneous price divergence in electric markets without strategic collusion.

Findings

Price divergence occurs mid-session and intensifies towards the end.

Price divergence is sensitive to agent preferences and budgets.

The model reproduces qualitative features of real electric markets.

Abstract

A minimal model of a market of myopic non-cooperative agents who trade bilaterally with random bids reproduces qualitative features of short-term electric power markets, such as those in California and New England. Each agent knows its own budget and preferences but not those of any other agent. The near-equilibrium price established mid-way through the trading session diverges to both much higher and much lower prices towards the end of the trading session. This price divergence emerges in the model without any possibility that the agents could have conspired to "game" the market. The results were weakly sensitive to the endowments but strongly sensitive to the nature of the agent's preferences and budget constraints.