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For an illustration of industry investment obtained under strategic behavior, compare figure 4. Most notably we obtain the same set of active technologies c [c, c] (char- acterized in lemma 3) as for the case under perfect competition and profit maximization. However as explained above, strategic firms take into account their opponents reactions at the spot markets when making their investment decisions. In the following section 6 we provide a detailed discussion, comparing the solutions under imperfect competition to the benchmark cases of welfare and profit maximization.

6

Comparison of the Theoretical Results

In this section we discuss and compare the solutions obtained in sections 3, 4, and 5. That is, we compare the two benchmark cases of welfare– and profit–maximization with the case of imperfect competition. Theorems 1, 2, and 3 characterize industry investment X(c) for for the different market structures, they all rely on specifying the locus of critical demand r e a l i z a t i o n s θ c . R e m e m b e r , f o r g i v e n i n d u s t r y i n v e s t m e n t X 0 ( c ) , t h e d e m a n d r e a l i z a t i o n θ c 0 ( X 0 ( c 0 ) ) w a s d e fi n e d s u c h a s t o g i v e r i s e t o p r o d u c t i o n a t m a r g i n a l c o s t c 0 [ c , c ] a spot market. In equilibrium, industry investment X(c) relates to those critical demand realizations θc by the well known optimality conditions for the different types of spot market competition.21 Both industry investment and corresponding critical demand realizations for all scenarios analyzed are illustrated in figure 4. t t h e

First notice that all solutions discussed in the peak load pricing literature (i.e. welfare– a n d p r o fi t m a x i m i z a t i o n , a n d a l l i n t e r m e d i a t e X λ s o l u t i o n s d i s c u s s e d i n r e m a r k 1 ) s h a r e

the same locus of critical demand realization22

θ F B

(c) for all c. In other words, for any given

technology c0, this technology will start to be operating at the very same demand realization θ 0 = θ c 0 F B , n o m a t t e r i f w e l f a r e o r t o t a l p r o fi t s o r a w e i g h t e d s u m o f b o t h i s m a x i m i Industry investment X(c) relate to those critical demand realizations by the well known z e d .

optimality

conditions

for

the

different

types

of

spot

market

competition

mentioned

above.

S i n c e a l l b e n c h m a r k c a s e s s h a r e t h e s a m e c r i t i c a l d e m a n d r e a l i z a t i o n ( θ c F B

), when comparing

them with each other, the usual well known arithmetic applies:

The monopoly outcome lies

21For the case of Perfect competition those are given by ”price equals marginal cost”, i.e. i.e. )+ P ( X F B ( c ) , θ c F B P ( )= X F for the B ( c ) , of Monopoly by ”marginal revenue equals marginal θ c F B ) + P q ( X F B ( c ) ) X F B c c a n d f o r t h e s o c a l l e d s e c c c, o n cost”, d b e s t s o l u t i case (c) = o n s b y P ( X λ ( c ) , θ c E Q

P 22 q ( X E Q ( c ) ) λ X λ ( c ) = c c . R e m e m b e r t h i s i s d e fi n e d b y F ( θ F B

(c))

1

kc(c) = 0 c [c, c]Compare theorem 1, theorem 2 and

Remark 1.

20

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