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Supply Function Equilibria: Step Functions and Continuous Representations

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  • Holmberg, P.
  • Newbery, D
  • Ralph, D.

Abstract

In most wholesale electricity markets generators must submit stepfunction offers of supply to a uniform price auction, and the market is cleared at the price of the most expensive offer needed to meet realised demand. Such markets can most elegantly be modelled as the purestrategy, Nash Equilibrium of continuous supply functions, in which each supplier has a unique profit maximising choice of supply function given the choices of other suppliers. Critics argue that the discreteness and discontinuity of the required steps can rule out pure-strategy equilibria and may result in price instability. This paper argues that if prices must be selected from a finite set the resulting step function converges to the continuous supply function as the number of steps increases, reconciling the apparently very disparate approaches to modelling electricity markets.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0863.

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Date of creation: Dec 2008
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Handle: RePEc:cam:camdae:0863

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Keywords: Auctions; supply function equilibria; convergence of stepfunctions; electricity markets.;

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Citations

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Cited by:
  1. Holmberg, P. & Willems, B., 2012. "Relaxing competition through speculation: Committing to a negative supply slope," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1252, Faculty of Economics, University of Cambridge.
  2. Bolle, Friedel & Grimm, Veronika & Ockenfels, Axel & del Pozo, Xavier, 2013. "An experiment on supply function competition," European Economic Review, Elsevier, Elsevier, vol. 63(C), pages 170-185.
  3. Holmberg, Pär & Newbery, David & Ralph, Daniel, 2009. "Supply Function Equilibria: Step Functions and Continuous Representations," Working Paper Series, Research Institute of Industrial Economics 788, Research Institute of Industrial Economics.
  4. Vives, Xavier, 2008. "Strategic supply function competition with private information," IESE Research Papers, IESE Business School D/774, IESE Business School.
  5. Vasin, A. & Daylova, E., 2013. "Analysis of the Short-Term Efficiency of Mechanisms of the Wholesale Electricity Market," Journal of the New Economic Association, New Economic Association, New Economic Association, vol. 18(2), pages 35-60.
  6. Holmberg, Pär & Newbery, David, 2009. "The Supply Function Equilibrium and Its Policy Implications for Wholesale Electricity Auctions," Working Paper Series, Research Institute of Industrial Economics 812, Research Institute of Industrial Economics.
  7. Pepermans, Guido & Willems, Bert, 2010. "Cost Recovery in Congested Electricity Networks," Working Papers, Hogeschool-Universiteit Brussel, Faculteit Economie en Management 2010/22, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
  8. Holmberg, Pär, 2014. "Pro-competitive Rationing in Multi-unit Auctions," Working Paper Series, Research Institute of Industrial Economics 1037, Research Institute of Industrial Economics.
  9. David Hudgins, 2012. "Optimal Willingness to Supply Wholesale Electricity under Asymmetric Linearized Marginal Costs," International Journal of Energy Economics and Policy, Econjournals, Econjournals, vol. 2(4), pages 307-317.

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