1. 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

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

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

4. (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

5. 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

6. (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

7. (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

8. 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.

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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

10. 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

11. 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

12. (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

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

14. 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

15. (c) 2002 Gerald B Sheble, all rights reserved
Time Layered Solution
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16. (c) 2002 Gerald B Sheble, all rights reserved
Market Interaction
11/19/2018
(c) 2002 Gerald B Sheble, all rights reserved

17. 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

18. 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

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

20. 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.

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Leontief SS Model
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22. (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

23. (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

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

25. (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

26. (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

27. 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

28. 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

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

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