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How good are supply function equilibrium models: an empirical analysis of the ERCOT balancing market

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Author Info

  • Ramteen Sioshansi

    ()

  • Shmuel Oren

    ()

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    Abstract

    We present an empirical analysis of a supply function equilibrium model in the Texas spot electricity market. We derive conditions for optimal bidding behavior in a spot market with ex ante bilaterally contracted sales. By estimating costs, we are able to derive a set of ex post-and ex ante-optimal supply functions and use a non-parametric behavioral model to compare our theoretically optimal supply functions to actual offers made. Our results show that with the exception of the largest generators, firms make offers with markups and markdowns far in excess of what a model of profit-maximizing behavior suggests. Copyright Springer Science+Business Media, LLC 2007

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    File URL: http://hdl.handle.net/10.1007/s11149-006-9008-6
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    Bibliographic Info

    Article provided by Springer in its journal Journal of Regulatory Economics.

    Volume (Year): 31 (2007)
    Issue (Month): 1 (February)
    Pages: 1-35

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    Handle: RePEc:kap:regeco:v:31:y:2007:i:1:p:1-35

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    Web page: http://www.springerlink.com/link.asp?id=100298

    Related research

    Keywords: Electricity markets; Supply function equilibrium; ERCOT; Market power;

    References

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    1. Green, Richard J, 1996. "Increasing Competition in the British Electricity Spot Market," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 205-16, June.
    2. Green, Richard & Newbery, David M G, 1991. "Competition in the British Electricity Spot Market," CEPR Discussion Papers 557, C.E.P.R. Discussion Papers.
    3. Holmberg, Pär, 2005. "Numerical Calculation of an Asymmetric Supply Function Equilibrium with Capacity Constraints," Working Paper Series 2005:12, Uppsala University, Department of Economics.
    4. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November.
    5. Holmberg, Pär, 2005. "Asymmetric Supply Function Equilibrium with Constant Marginal Costs," Working Paper Series 2005:16, Uppsala University, Department of Economics.
    6. Ross Baldick & Ryan Grant & Edward Kahn, 2004. "Theory and Application of Linear Supply Function Equilibrium in Electricity Markets," Journal of Regulatory Economics, Springer, vol. 25(2), pages 143-167, 03.
    7. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
    8. Holmberg, Pär, 2004. "Unique Supply Function Equilibrium with Capacity Constraints," Working Paper Series 2004:20, Uppsala University, Department of Economics.
    9. Hurlbut, David & Rogas, Keith & Oren, Shmuel, 2004. "Protecting the Market from "Hockey Stick" Pricing: How the Public Utility Commission of Texas is Dealing with Potential Price Gouging," The Electricity Journal, Elsevier, vol. 17(3), pages 26-33, April.
    10. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
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