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Cournot Versus Supply Functions: What does the Data Tell us?

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  • Willems, Bert
  • Rumiantseva, I.
  • Weigt, H.

    (Tilburg University, Center for Economic Research)

Abstract

The liberalization of the electricity sector increases the need for realistic and robust models of the oligopolistic interaction of electricity firms. This paper compares the two most popular models: Cournot and the Supply Function Equilibrium (SFE), and tests which model describes the observed market data best. Using identical demand and supply specifications, both models are calibrated to the German electricity market by varying the contract cover of firms. Our results show that each model explains an identical fraction of the observed price variation. We therefore suggest using Cournot models for short term analysis, as more market details, such as network constraints, can be accommodated. As the SFE model is less sensitive to the choice of the calibration parameters, it might be more appropriate for long term analysis, such as the study of a merger.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2007-63.

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Date of creation: 2007
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Handle: RePEc:dgr:kubcen:200763

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  1. Neuhoff, Karsten & Barquin, Julian & Boots, Maroeska G. & Ehrenmann, Andreas & Hobbs, Benjamin F. & Rijkers, Fieke A.M. & Vazquez, Miguel, 2005. "Network-constrained Cournot models of liberalized electricity markets: the devil is in the details," Energy Economics, Elsevier, vol. 27(3), pages 495-525, May.
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Citations

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Cited by:
  1. Sakellaris, Kostis, 2010. "Modeling Electricity Markets as Two-Stage Capacity Constrained Price Competition Games under Uncertainty," MPRA Paper 23317, University Library of Munich, Germany.
  2. Liebl, Dominik, 2010. "Modeling hourly Electricity Spot Market Prices as non stationary functional times series," MPRA Paper 25017, University Library of Munich, Germany.
  3. Holmberg, P. & Willems, Bert, 2012. "Relaxing Competition through Speculation: Committing to a Negative Supply Slope," Discussion Paper 2012-039, Tilburg University, Tilburg Law and Economic Center.
  4. Knittel, Christopher R & Metaxoglou, Konstantinos, 2008. "Diagnosing Unilateral Market Power in Electricity Reserves Market," Institute of Transportation Studies, Working Paper Series qt14q6c0mk, Institute of Transportation Studies, UC Davis.
  5. Janssen, Matthias & Wobben, Magnus, 2008. "Electricity pricing and market power: Evidence from Germany," CAWM Discussion Papers 9, Center of Applied Economic Research Münster (CAWM), University of Münster.
  6. Janssen, Matthias & Wobben, Magnus, 2008. "Electricity Pricing and Market Power - Evidence from Germany," MPRA Paper 11400, University Library of Munich, Germany.
  7. Pepermans, Guido & Willems, Bert, 2010. "Cost recovery in congested electricity networks," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/277362, Katholieke Universiteit Leuven.
  8. Matthias Janssen & Magnus Wobben, . "Electricity Pricing and Market Power - Evidence from Germany," Working Papers 200121, Institute of Spatial and Housing Economics, Munster Universitary.
  9. Silvester Van Koten & Andreas Ortmann, 2011. "Structural versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns," CERGE-EI Working Papers wp437, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  10. Holmberg, P. & Newbery, D., 2010. "The Supply Function Equilibrium and its Policy Implications for Wholesale Electricity Auctions," Cambridge Working Papers in Economics 1016, Faculty of Economics, University of Cambridge.
  11. Himpens, Pieter & Morbée, Joris & Proost, Stef, 2011. "Taxation of nuclear rents: benefits, drawbacks and alternatives," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/313199, Katholieke Universiteit Leuven.
  12. Francesca Bonenti & Giorgia Oggioni & Elisabetta Allevi & Giacomo Marangoni, 2011. "Evaluating the Impacts of the EU-ETS on Prices, Investments and Profits of the Italian Electricity Market," Working Papers 2011.99, Fondazione Eni Enrico Mattei.
  13. Keller, Andreas, 2010. "Competition effects of mergers: An event study of the German electricity market," Energy Policy, Elsevier, vol. 38(9), pages 5264-5271, September.
  14. Meredith Fowlie, 2008. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," NBER Working Papers 14421, National Bureau of Economic Research, Inc.

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