Influence of structure and ownership of lignite opencast mine and power plant bilateral monopoly on its operation

Abstract

Lignite mine and power plant can operate as two separate entities, two entities in one holding or joint venture and as the one vertically integrated energy producer. Each of these solutions has the influence on operation of this tandem including realization of its individual and joint objectives, price negotiation, transactional costs, irreversible investments (sunk costs), different access to information (asymmetric information), cooperation or rivalry, possibility of opportunistic behaviour and other threats, which can be used against the second side. An attempt has been made to show these problems from the point of view of economic effectiveness based on a bilateral monopoly (BM) model and game theory approach with usage of pit optimisation methods. Advantages and disadvantages of different solutions have been presented as well as rational incentives to vertical integration due to inherent conflict of individual and group rationality in BM. This conflict of interest can lead to Pareto sub optimal solution in case of lack of cooperation between both sides. Concentration on lignite price can lead to waste of potential profit and decrease of mineable reserves - excavation of smaller pit, which is optimal only to the mine but not to the whole BM.bilateral monopoly; lignite mine; lignite power plant; price negotitiation; vertical structure; vertical integration; lignite price; opportunism; asymmetry of information; deposit knowledge; ownership structure; cooperative game; zero sum game; non-zero suma game; Pareto optimality; profit division; individual rationality; group rationality; long-term contract