Spatially oligopolistic model with opportunity cost pricing for transmission capacity reservations - A variational inequality approach

Two markets co-exist in a unbundled electricity supply industry: the one of the electricity supply and the one of transmission capacity reservations. The first one could be assumed as an oligopoly, and the second one, as a natural monopoly, is regulated. The prices in the first market are determined by an oligopolistic equilibrium. The prices in the second market are set equal to the opportunity costs. The strong interaction of the behavior of the two markets requires a new concept of equilibrium. In this equilibrium, the two markets must be simultaneously in their own equilibrium: Nash equilibrium in the first market and market-clearing equilibrium in the second. An equilibrium of the market is defined and variational inequality approach is used to solve the problem. A simulation using this model is done for an electricity supply market organized across 4 European countries.