Rational,emotional and normfollowing actors and liberal free trade in the Norwegian electricity market

Abstract

This article explores the implications of different behavioral assumptions for market outcomes. This is done by modeling emotionally and normatively oriented actors alongside the ‘rational’ economic ideal type in a system dynamics simulation of a free trade market. The simulation exercise has a concrete case focus, as the model incorporates stylized elements of the Norwegian electricity market, which is a free trade market with a large number of buyers and sellers.

The article has three sections. The first section gives a short overview of the three ideal type actors and the behavioral assumptions behind them.

The second section presents a simulation model of the Norwegian electricity market, a free trade market with more than 130 actors. One of the peculiarities of this market is its exposure to seasonal and yearly variations in rainfall, as Norwegian electricity production is almost exclusively hydropower based. This exogenously generated variation in production capacity creates distortions that trigger endogenous behavioral reactions in our model.

The third section presents the results of the modeling exercise, showing that actor rationality does matter for price generation in a competitive market. Moving from a market dominated by calculative behavior towards a market dominated by emotional behavior causes greater volatility in market prices and more pronounced price cycles.