Just Starting Out: Learning and Equilibrium in a New Market
- American Economic Review (Forthcoming)
We document the evolution of the new market for frequency response within the UK electricity system over a six-year period.
Firms competed in price while facing considerable initial uncertainty about demand and rival behavior. We show that over time
prices stabilized, converging to a rest point that is consistent with
equilibrium play. We draw on models of fictitious play and adaptive learning to analyze how this convergence occurs and show
that these models predict behavior better than an equilibrium model
prior to convergence.
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