Stabilizing energy markets: A dynamic analysis of price cap regulation in oligopolistic environments

Abstract

This paper provides a theoretical analysis of Cournot oligopoly dynamics under price cap regulation, particularly in the context of exogenous shocks, akin to recent events in the energy markets. Utilizing the 0–1 chaos test, we identified significant shifts in market behavior, highlighting the sensitivity of oligopolistic energy markets to regulatory parameters. Our findings indicate that improperly set tax policies can lead to chaotic and unstable market conditions. Exogenous shocks can cause firm divergence, which can be mitigated by introducing a short-term price cap. The analysis demonstrates that price caps effectively moderate the impact of exogenous shocks, enabling firms to revert to their pre-shock state without altering market dynamics. Moreover, the results suggest that price caps are more effective than windfall taxes. This research underscores the necessity for precise and adaptive regulatory frameworks to maintain market stability and protect both consumers and businesses from extreme price fluctuations. These insights are vital for policymakers aiming to design interventions that balance market stability with consumer protection in an increasingly interconnected and volatile global economy.