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Market Power and Platform Design in Decentralized Electricity Trading

Nicolas Eschenbaum, Nicolas Greber

Abstract

This paper studies how platform design shapes strategic behavior in decentralized electricity trading. We develop a finite-horizon dynamic game in which photovoltaic- and battery-equipped players ("prosumers") trade on a platform that maps aggregate imports and exports into internal buy and sell prices. We establish existence of a perfect conditional epsilon-equilibrium and characterize a Cournot-like market-power mechanism in an observable-types benchmark of the game: because the producer price is decreasing in aggregate exports, strategic prosumers withhold supply and underutilize storage relative to the price-taking benchmark. To quantify these effects, we use a multi-agent computational framework that exploits the differentiable structure of the platform's clearing rule to compare planner, price-taking, and strategic outcomes under alternative pricing mechanisms. In our baseline calibration, strategic play raises grid settlement cost by about 6 percent relative to price-taking. The magnitude of the distortion depends strongly on platform design: some designs can largely eliminate strategic incentives, while increased competition in storage ownership sharply reduces withholding, with most of the distortion disappearing once storage is split across more than three owners. We also find that information disclosure can improve competitive coordination but also increase the market power effects. Despite these distortions, the platform remains highly valuable overall, reducing a passive consumer's annual electricity bill by roughly 40 percent relative to exclusive grid settlement, with strategic behavior clawing back only about 8 percent of that saving. The results show that pricing rules, information disclosure, and ownership structure determine how much of the gains from decentralized electricity trading are realized.

Market Power and Platform Design in Decentralized Electricity Trading

Abstract

This paper studies how platform design shapes strategic behavior in decentralized electricity trading. We develop a finite-horizon dynamic game in which photovoltaic- and battery-equipped players ("prosumers") trade on a platform that maps aggregate imports and exports into internal buy and sell prices. We establish existence of a perfect conditional epsilon-equilibrium and characterize a Cournot-like market-power mechanism in an observable-types benchmark of the game: because the producer price is decreasing in aggregate exports, strategic prosumers withhold supply and underutilize storage relative to the price-taking benchmark. To quantify these effects, we use a multi-agent computational framework that exploits the differentiable structure of the platform's clearing rule to compare planner, price-taking, and strategic outcomes under alternative pricing mechanisms. In our baseline calibration, strategic play raises grid settlement cost by about 6 percent relative to price-taking. The magnitude of the distortion depends strongly on platform design: some designs can largely eliminate strategic incentives, while increased competition in storage ownership sharply reduces withholding, with most of the distortion disappearing once storage is split across more than three owners. We also find that information disclosure can improve competitive coordination but also increase the market power effects. Despite these distortions, the platform remains highly valuable overall, reducing a passive consumer's annual electricity bill by roughly 40 percent relative to exclusive grid settlement, with strategic behavior clawing back only about 8 percent of that saving. The results show that pricing rules, information disclosure, and ownership structure determine how much of the gains from decentralized electricity trading are realized.
Paper Structure (34 sections, 2 theorems, 62 equations, 9 figures, 12 tables)

This paper contains 34 sections, 2 theorems, 62 equations, 9 figures, 12 tables.

Table of Contents

  1. Introduction
  2. A model of prosumer trading
  3. Setup
  4. Prices, platform settlement, and payoffs
  5. Information, timing, strategies, and beliefs
  6. Equilibrium analysis
  7. Equilibrium existence with private types
  8. Market power effects with observable types
  9. Computational framework
  10. Multi-agent differentiable market-clearing
  11. Data and calibration
  12. Pricing mechanisms
  13. Computational Results
  14. Baseline ordering
  15. Competition and market power
  16. ...and 19 more sections

Key Result

Proposition 1

For every $\varepsilon>0$, the private-information game possesses a perfect conditional $\varepsilon$-equilibrium [Myerson & Reny, 2020, Theorem 9.3]. Moreover, this existence result is unchanged (without loss) if each player also observes her realized per-period payment $c_{it}$ (equivalently $u_{i

Figures (9)

  • Figure 1: Best-response curves and convergence to Nash equilibrium in a two-prosumer stage game with net exporters.
  • Figure 2: Best-response curves and convergence to MPE in a two-prosumer, two-period game with net exporters.
  • Figure 4: Average battery SOC over 24 hours by regime (SDR, five seeds, $\pm 1$ s.d.). The planner uses all three batteries; storage agent C is idle under price-taking. Strategic agents retain higher terminal SOC.
  • Figure 5: Average sell and buy prices over 24 hours (SDR, five seeds, $\pm 1$ s.d.). Strategic play raises evening buy prices by $\approx 0.03\,$USD/kWh relative to price-taking.
  • Figure 6: Total battery SOC over 24 hours under strategic play, by number of competing storage agents $N$ (SDR, five seeds, $\pm 1$ s.d.). Battery utilisation increases monotonically with competition.
  • ...and 4 more figures

Theorems & Definitions (4)

  • Proposition 1: Private Types
  • Proposition 2: Observable Types
  • proof
  • proof