Game-Theoretic Approach to Electricity Pricing in Nigeria's Deregulated Market: A Mechanism Design Perspective

This paper provides an evaluation of Nigeria's deregulated electricity market based on game theory models and mechanism design principles in terms of its efficiency, sustainability, and affordability. Three traditional models—Cournot, Bertrand, and Stackelberg—were utilized to characterize the strategic decisions and interaction of GenCos and DisCos. The analysis through these models showed the use of restriction on output in the Cournot model as a way of maintaining the high tariffs, whereas it indicated that the Bertrand model resulted in unsustainable price competition among the companies. The Stackelberg model indicated dominance of the large firms, where the decision of leadership tilted the prices and revenue in favor of such firms and maintained inequalities in market operation. An analysis of the MYTO showed some level of inefficiency associated with over reporting and cost inflation, which leads to distorted tariffs and liquidity crises. On the other hand, the analysis with VCG showed true reporting, a low clearance price, and up to 20% higher efficiency compared to what is observed without mechanism design. Also, the elasticity analysis shows consumers are price responsive in Nigeria; hence, the need for price constraints on the tariff determination process. Overall analysis shows a disconnect between the use of traditional models and current market mechanisms in Nigeria in the determination of an efficient and equitable tariff and, thus, a justification for the use of mechanism design as a future path for an efficient, sustainable, and affordable electricity market in Nigeria. The final conclusion recommends integration of mechanism design and elasticity to attain the efficiency, sustainability, and welfare objectives of deregulation.