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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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Web page: http://center.uvt.nl

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Keywords: supply function equilibrium; Cournot competition; electricity markets;

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  1. Juan Delgado, 2005. "Coalition-Proof Supply Function Equilibria Under Capacity Constraints," Economics Working Papers we052314, Universidad Carlos III, Departamento de Economía.
  2. Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2003. "Competition with Forward Contracts: A Laboratory Analysis Motivated by Electricity Market Design," Levine's Bibliography 666156000000000172, UCLA Department of Economics.
  3. Xavier Vives, 2009. "Strategic Supply Function Competition with Private Information," Cowles Foundation Discussion Papers 1736, Cowles Foundation for Research in Economics, Yale University.
  4. Ciarreta, Aitor & Gutierrez-Hita, Carlos, 2006. "Supply function vs. quantity competition in supergames," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 773-783, July.
  5. Evans, J. & Green, R., 2003. "Why did British Electricity Prices Fall after 1998?," Cambridge Working Papers in Economics 0326, Faculty of Economics, University of Cambridge.
  6. Bushnell, James & Mansur, Erin T. & Saravia, Celeste, 2008. "Vertical Arrangements, Market Structure and Competition: An Analysis of Restructured U.S. Electricity Markets," Staff General Research Papers 13130, Iowa State University, Department of Economics.
  7. Holmberg, Par, 2008. "Unique supply function equilibrium with capacity constraints," Energy Economics, Elsevier, vol. 30(1), pages 148-172, January.
  8. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October.
  9. Ventosa, Mariano & Baillo, Alvaro & Ramos, Andres & Rivier, Michel, 2005. "Electricity market modeling trends," Energy Policy, Elsevier, vol. 33(7), pages 897-913, May.
  10. Hu, X. & Ralph, D. & Ralph, E.K. & Bardsley, P. & Ferris, M.C., 2004. "Electricity Generation with Looped Transmission Networks: Bidding to an ISO," Cambridge Working Papers in Economics 0470, Faculty of Economics, University of Cambridge.
  11. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  12. 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.
  13. 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.
  14. Bolle, Friedel, 1992. "Supply function equilibria and the danger of tacit collusion : The case of spot markets for electricity," Energy Economics, Elsevier, vol. 14(2), pages 94-102, April.
  15. Ramteen Sioshansi & Shmuel Oren, 2007. "How good are supply function equilibrium models: an empirical analysis of the ERCOT balancing market," Journal of Regulatory Economics, Springer, vol. 31(1), pages 1-35, February.
  16. Borenstein, Severin & Bushnell, James & Knittel, Chris, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," Staff General Research Papers 31548, Iowa State University, Department of Economics.
  17. Bert Willems, 2002. "Modeling Cournot Competition in an Electricity Market with Transmission Constraints," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 95-125.
  18. 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.
  19. Delgado, Juan & Moreno, Diego, 2004. "Coalition-proof supply function equilibria in oligopoly," Journal of Economic Theory, Elsevier, vol. 114(2), pages 231-254, February.
  20. Holmberg, Pär, 2005. "Asymmetric Supply Function Equilibrium with Constant Marginal Costs," Working Paper Series 2005:16, Uppsala University, Department of Economics.
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