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Limit Pricing and Entry Game of Renewable Energy Firms into the Energy Sector

Author

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  • Willi Semmler
  • Giovanni Di Bartolomeo
  • Behnaz Minooei Fard
  • Joao Paulo Braga
Abstract
Governments attempt to provide the energy sector with incentives to replace old technologies with new ones based on renewable energy as the most effective way to combat climate change. Yet in the energy sector prevail fossil fuel incumbents that inhibit renewable energy entrants. Our paper provides a game-theoretic stylization of competition between those two types of firms. Incumbents set prices and entrants respond with quantity adjustments. In the context of a dynamic limit pricing model, we study the entry dynamics in a market in which the dominant firms (fossil fuel energy suppliers) face the entry of a group of competitive fringe firms (renewable energy suppliers) when the dominant firms have easier access to financial markets, but the fringe firms finance their expansion with internal finance. We also investigate the effect of the public support of renewable energy firms through subsidies. Our model is built on Judd and Peterson (1986, JET), but our solutions are obtained through a non-linear model predictive control algorithm. By this technique, we can predict the outcome of the competition between incumbents and entrants and the impact of financial and fiscal policies considering moving-horizon strategies.

Suggested Citation

  • Willi Semmler & Giovanni Di Bartolomeo & Behnaz Minooei Fard & Joao Paulo Braga, 2021. "Limit Pricing and Entry Game of Renewable Energy Firms into the Energy Sector," Working Papers in Public Economics 200, University of Rome La Sapienza, Department of Economics and Law.
    • Handle: RePEc:sap:wpaper:wp200
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    Cited by:

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    2. Chen, Pu & Semmler, Willi, 2024. "Wage – price dynamics and financial market in a disequilibrium macro model: A Keynes – Kaldor – Minsky modeling of recession and inflation using VECM," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 433-452.
    3. Lu, Ling & Liu, Peng & Yu, Jian & Shi, Xunpeng, 2023. "Digital inclusive finance and energy transition towards carbon neutrality: Evidence from Chinese firms," Energy Economics, Elsevier, vol. 127(PB).
    4. Jianping Gu & Yi Li & Jingke Hong & Lu Wang, 2024. "Carbon emissions cap or energy technology subsidies? Exploring the carbon reduction policy based on a multi-technology sectoral DSGE model," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-17, December.
    5. Braga, Joao Paulo & Semmler, Willi & Grass, Dieter, 2021. "De-risking of green investments through a green bond market – Empirics and a dynamic model," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).

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    More about this item

    Keywords

    Global warming; Renewable energy; Limit pricing; Strategic entry game; Non-linear model predictive control;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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