Dynamic pricing and strategic retailers in the energy sector: A multi-leader-follower approach

Oggioni G, Schwartz A, Wiertz AK, Zöttl G (2024)

Publication Type: Journal article

Publication year: 2024

Journal

European Journal of Operational Research Elsevier

Book Volume: 312

Pages Range: 255-272

Journal Issue: 1

Abstract

We consider strategic retail pricing in markets, where retail companies buy commodities at fluctuating wholesale prices and resell them to final consumers by applying dynamic retail tariffs. This is of especially large relevance in the context of energy markets where substantial wholesale price fluctuations are observed. Policy makers currently foster the introduction of such dynamic tariff schemes. From a modelling point of view, we propose a multi-leader-follower problem to investigate the implications of strategic retail pricing and we compare the impacts of implementing dynamic tariffs on retailers and final consumers. Our analysis tackles different aspects: first, we formulate the model and provide theoretical results. Second, we develop algorithms, which solve the multi-leader-follower problem and allow us to characterize the resulting market equilibria. Third, we calibrate and solve our framework based on data of the German retail electricity market for the years 2020 and 2021. This allows us to quantitatively assess the impact of introducing real time prices on retailers’ profits and customers’ benefits. As our results show, dynamic real-time pricing on the one hand typically increases market efficiency, which confirms previous results obtained without the explicit consideration of strategic behavior. On the other hand, however, as a novel aspect, dynamic real-time pricing turns out to significantly reduce equilibrium profits in case of strategic firms. This effect is especially large in environments with strongly fluctuating wholesale prices.

Authors with CRIS profile

Ann-Kathrin Wiertz Sonderforschungsbereich/Transregio 154: Mathematische Modellierung, Simulation und Optimierung am Beispiel von Gasnetzwerken Karl Gregor Zöttl Professur für Volkswirtschaftslehre

Related research project(s)

B09: Strategische Entscheidungen unter Unsicherheit im Entry-Exit-System (SFB/TRR-3) TRR 154: Mathematical Modelling, Simulation and Optimisation Using the Example of Gas Networks (TRR 154) July 1, 2022 - June 30, 2026

Involved external institutions

Università degli Studi di Brescia IT Italy (IT) Technische Universität Dresden DE Germany (DE)

How to cite

APA:

Oggioni, G., Schwartz, A., Wiertz, A.-K., & Zöttl, G. (2024). Dynamic pricing and strategic retailers in the energy sector: A multi-leader-follower approach. European Journal of Operational Research, 312(1), 255-272.

MLA:

Oggioni, Giorgia, et al. "Dynamic pricing and strategic retailers in the energy sector: A multi-leader-follower approach." European Journal of Operational Research 312.1 (2024): 255-272.

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