Belangrijkste concepten
The optimal strategy for a benevolent social planner in an electricity market is to be exactly one level more rational than its self-interested opponent. Being less or more rational can both lead to reduced social welfare.
Samenvatting
This paper examines the impact of bounded rationality, modeled using level-k reasoning, on the outcomes in an electricity market with a self-interested firm and a benevolent social planner.
The key findings are:
The optimal strategy for the benevolent social planner is to be exactly one level more rational than the self-interested firm. Being less or more rational can both result in decreased social welfare.
The social welfare outcome under the level-k reasoning model can be better, equal, or worse than the fully rational Nash equilibrium, depending on the network constraints. Bounded rationality plays a crucial role in determining the system outcomes.
The paper proposes different strategies for the benevolent social planner to respond to the self-interested firm, depending on the information available - complete, incomplete, or no information. The performance of these strategies is compared through numerical studies.
Statistieken
The total quantity produced at the optimal social welfare is 1 - c.
The total quantity produced at the Nash equilibrium is (1 - c)/2 + f/2.
Citaten
"The optimal strategy for the benevolent social planner is to be exactly one level more rational than its self-interested opponent."
"Being less or more rational can both lead to reduced social welfare."