Computational Management Science

, Volume 3, Issue 4, pp 307–330 | Cite as

Leader-Follower Equilibria for Electric Power and NO x Allowances Markets

  • Yihsu Chen
  • Benjamin F. Hobbs
  • Sven LeyfferEmail author
  • Todd S. Munson
Original Paper


This paper investigates the ability of the largest producer in an electricity market to manipulate both the electricity and emission allowances markets to its advantage. A Stackelberg game to analyze this situation is constructed in which the largest firm plays the role of the leader, while the medium-sized firms are treated as Cournot followers with price-taking fringes that behave competitively in both markets. Since there is no explicit representation of the best-reply function for each follower, this Stackelberg game is formulated as a large-scale mathematical program with equilibrium constraints. The best-reply functions are implicitly represented by a set of nonlinear complementarity conditions. Analysis of the computed solution for the Pennsylvania–New Jersey–Maryland electricity market shows that the leader can gain substantial profits by withholding allowances and driving up NO x allowance costs for rival producers. The allowances price is higher than the corresponding price in the Nash–Cournot case, although the electricity prices are essentially the same.


Mathematical programs with equilibrium constraints (MPEC) Game theory (Stackelberg game) Economic market modelling Optimization algorithm Electric power 

MSC Classification

91B26 Market Model 


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Copyright information

© Springer-Verlag 2006

Authors and Affiliations

  • Yihsu Chen
    • 1
  • Benjamin F. Hobbs
    • 1
  • Sven Leyffer
    • 2
    Email author
  • Todd S. Munson
    • 2
  1. 1.Department of Geography and Environmental EngineeringThe Johns Hopkins UniversityBaltimoreUSA
  2. 2.Mathematics and Computer Science DivisionArgonne National LaboratoryArgonneUSA

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