Tacit Collusion in Electricity Markets with Uncertain Demand

In this paper we model wholesale electricity markets as infinitely repeated games that are played under demand uncertainty. We examine the uniform-price auction and show that symmetric bidding at the price cap constitutes the optimal collusive equilibrium under perfectly inelastic demand in the duopoly and oligopoly models. We further extend our analysis to study the impact of price-responsive demand and cost-asymmetry on the collusive equilibrium. The main implication of our analysis is the importance of a vigilant energy regulatory authority to the success of liberalized electricity markets.