Imperfect Competition in the International Energy Market: A Computerized Nash-Cournot Model

Abstract

This paper describes the conceptual structure, properties, and solution approach of a computerized model of the international energy market. The model treats energy producers as players in a multistage, noncooperative game. The goal of each player (or cartel of players) is assumed to be maximization of discounted profit subject to technical, political, and resource constraints. The model calculates that collection of intertemporal extraction and price paths from which a player can unilaterally deviate only at a loss—the open-loop, Nash equilibrium. The model integrates the theory of exhaustible resources due to Hotelling and the theory of oligopoly due to Nash and Cournot. Although useful as a teaching device to illustrate theoretical results, its main function is to facilitate analysis of real-world resource problems. The model is flexible, allowing the user to specify not only cost, demand, and reserve information but also assumptions about who belongs to what coalition. Two shortcomings deserve note. The strategies of players are restricted to time-dated (open-loop) paths. Also, lags cannot be accommodated in the current version. The restriction of the strategy space significantly increases tractability and will permit the incorporation of lags and other complications in the future. The model was built under government contract and is in the public domain.

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