Strategic reneging and market power in sequential markets

Abstract

This paper investigates the incentives for firms with market power to manipulate markets by strategically reneging on forward commitments. We first study the behaviour of a dominant firm in a two-period model with demand uncertainty. We then use the model’s predictions and a machine learning approach to investigate multiple occurrences of reneging on long-term commitments in Alberta’s electricity market in 2010-2011. We find that a supplier significantly increased its revenues by strategically reneging on its capacity availability obligations, causing Alberta’s annual electricity procurement costs to increase by as much as $600 million (+17%).