Market Failures Structure & External Forces Iowa State University 11/19/2018 Market Failures Structure & External Forces Gerald B. Sheblé Professor Iowa State University 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved (c) 2002 Gerald B Sheble, all rights reserved

Market Power Indices (Cont.) $ D P 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Market Power Indices (FCG) $ D P 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Market Power Indices Known Customer Value $ D P 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Long Term Competitive Considerations Strategic Factors Barriers to increased competition Patents Intellectual property rights Economies of scale Plant size Information gathering costs Regulatory barriers Franchise rights Market rules 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Assumptions Can the seller prevent resale among bidders from occurring after the auction Can the seller commit to not sell the withheld goods after the auction. Can strategic action be used to optimize the established firm’s response to the auction problem when these barriers arise? 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Fundamental Concerns To have a complete set of futures and contingent markets given, in particular, the asymmetries of information and transaction costs. The failures concerning welfare economics includes three cases: public goods consumption, production and consumption are not individually independent, and the convexity of the productions sets and preferences. The hypothesis of pure and perfect consumption which permits the definition of rival supplies and demands. 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Ideal Market Desired by participants. Liquid. Large number of participants. New information enters randomly. Players react quickly to new information and adjust prices. Adjustments are on average unbiased.

(c) 2002 Gerald B Sheble, all rights reserved A Few Years AGO Unit Commitment (24 – 168 hours or more into the future). Demand Forecast (matched Unit Commitment) Power Flow (any future period, even beyond present configuration). Interchange Scheduling (2 - 6 months into the future) 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Electricity Commodity - ST Market details Spot market (1 to 744 hours) Purchase power for immediate delivery Forward market (1 to 18 months) Can trade power for any hour during the next 18 months Futures market (energy MWHrs: next 18 months) Trade energy in MWHrs for a particular month Brought into forward market via swap market Options 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Electricity Commodity - LT Market details. Planning (1 to 10 years). Purchase power. Price. Quantity. Period of time. Purchase services. Voltage support. Demand following. Etc. 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Market Interaction time horizon (in months) 1 18 spot market forward market swap market (moves contracts from market to market) futures market planning market 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Leontief Model/Value Chain 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Priced Based Operation Iowa State University 11/19/2018 Priced Based Operation Fuel companies GENCOs TRANSCOs ISOs/POOLCOs/RTOs = ICA BROCOs/TRACOs ESCOs(ESP) DISTCOs 11/19/2018 (C) 2001 Gerald B. Sheblé (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Time Layered Solution 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Market Interaction 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Structure of Exchange Economy Resource Markets Resources, Money, Taxes, Services Manufacturer Markets Resources, Money, Services, Taxes Government Markets Services, Taxes Consumer Markets Resources, Money, Goods, Services Intermediary Markets 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Five Forces Determining Segment Structural Attractiveness Iowa State University 11/19/2018 Five Forces Determining Segment Structural Attractiveness Potential Entrants (Threat of Mobility) Suppliers (Supplier power) Industry Competitors (Segment rivalry) Buyers (Buyer power) Substitutes (Threats of substitutes) 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved (c) 2002 Gerald B Sheble, all rights reserved 1

Heterogeneous Products Through Exchanges 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Pricing Criteria Price changes should be independent of one another and random. Present expected returns for a contract in an efficient market should reflect new information and the risk of operation. Efficient market hypotheses. Expected return of fair game model. Weak, semi-strong, and strong forms.

(c) 2002 Gerald B Sheble, all rights reserved Leontief SS Model 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Ausubel Cramton Defines the optimal auction as one “that maximizes the seller’s expected revenues.” Conflict between Revenue maximization Efficiency Two examples Misassignment of goods Withholding of goods 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Porter’s Five Forces Barriers to entry Rivalry among existing competitors Substitutes Power of Buyers Power of Suppliers 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Dynamic Electric Market Structure 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Iowa State University 11/19/2018 Implementing Markets Auction implemented using optimization algorithm, but same effect as: Buyers and sellers submit bids for some standard size block of MW The coordinator Adjusts bids for transmission costs and ancillary services Matches the highest buy bid with the lowest sell offer Continues matching while bids are profitable 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Integrated Systems Decision Support Systems Gather data Validate models Validate data Data mine Competition Customers Implement optimal decisions 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Testing and Evolving Strategies Bidding strategies are judged by the profit they bring agents who use them. Using a new techniques, the envelope of the found solution adapts to increase performance. Multiple market interaction leads to unique risk management. 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Building Bidding Strategies Some of the inputs considered in building our fuzzy bidding strategies. Risk tolerance. Fuel costs. Forecasted prices. Unit availability (yours or the competitions). Other’s bidding strategies. Etc. We can use expert knowledge to encode the rules and then fine-tune them by varying the ranges of the membership, the weightings of the individual rules. 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

(c) 2002 Gerald B Sheble, all rights reserved Market Interaction 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved

Decentralized Optimization Coal Market Oil Natural Gas Environmental Electricity 11/19/2018 (c) 2002 Gerald B Sheble, all rights reserved