Competition along a river : Decentralizing hydropower production

We analyze the production of electricity from n power stations situated along a river in a dynamic model. Each power station's production of electricity is constrained by the quantity of water available to it (capacity constraint) as well as limitations of reservoir capacity (storage constraint). Due to the water flow, production from one power station affects the production capacity of the next downstream power station. We show that when no constraint (capacity or storage) is binding, competition dominates monopoly. We then provide some examples in which, because one power station is constrained, monopoly dominates competition. Finally, we illustrate the model with an empirical example.