Pricing dynamics of electricity in privatized markets with underdeveloped networks

Electricity utilities in developing countries face the challenge of increasing their network size while facing regulatory instruments like emission taxes in an underdeveloped network. The challenge is on which pricing strategy to implement to maximize long run profits. In addition, developing countries face a monopolistic market design and low levels of electricity access. To address these challenges, this work seeks to identify the pricing strategy for the utility players facing in a competitive market. We investigate the pricing and network dynamics of a rational profit maximization entrant utility competing with a profit maximizing dominant incumbent. Each utility seeks to identify a pricing path that maximizes its long run profits by increasing its network size. Using optimal control theory, the problem is modeled as a dynamic differential game; in this case, a Nash differential game. The variables of choice are the price and the network size. The explicit equilibrium solution is obtained by solving a set of two second order differential equations for the Nash equilibrium. Both utilities adopt an increasing pricing path and the steady state network sizes depends on the price levels set by the competitor and the model parameters. The policy implication of these equilibria solutions is also presented.