Determination of Transmission Capacity for a Two-node Market

We examine a two-node competitive market, taking into account the losses under transmission and the costs of transmission line construction. We state a welfare maximization problem and show how to solve it. Moreover, we analyze how the flow of good between markets affects the benefit of transmission system, consumer surplus and producers’ profit. We also consider a two-node market under imperfect competition and study the Cournot equilibrium depending on the transmission capacity.