Redesigning Probabilistic Production Costing models and reliability measures in the presence of market demand elasticity

Abstract

The ability to analyze the market performance, set proper objectives and to anticipate and analyze the market response to potential new mechanisms is essential for regulators. In this context, simulation models represent powerful tools to assist the regulator in his duties. The objective of this paper is to illustrate and deal with the proper definition of metrics to evaluate whether the market is reaching efficient outcomes. To do so, we first extend the classic formulation of the classic Probabilistic Production Cost models (PPC) by proposing a novel algorithm that allows easily and efficiently to introduce demand elasticity and then on this basis we illustrate how traditional reliability measures are not suitable metrics to be used when a non-negligible part of the demand is elastic.