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

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Author Info
Willems, Bert
Rumiantseva, I.
Weigt, H. (Tilburg University, Center for Economic Research)

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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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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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Find related papers by JEL classification:
L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Green, Richard J & Joanne Evans, 2003. "Why did British electricity prices fall after 1998?," Royal Economic Society Annual Conference 2003 92, Royal Economic Society. [Downloadable!]
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  2. 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. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!]
  5. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2007. "Vertical Arrangements, Market Structure, and Competition An Analysis of Restructured U.S. Electricity Markets," NBER Working Papers 13507, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Holmberg, Pär, 2005. "Asymmetric Supply Function Equilibrium with Constant Marginal Costs," Working Paper Series 2005:16, Uppsala University, Department of Economics. [Downloadable!]
  7. Delgado, Juan & Moreno, Diego, 2004. "Coalition-proof supply function equilibria in oligopoly," Journal of Economic Theory, Elsevier, vol. 114(2), pages 231-254, February. [Downloadable!] (restricted)
  8. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
  11. Green, Richard J, 1996. "Increasing Competition in the British Electricity Spot Market," Journal of Industrial Economics, Blackwell Publishing, vol. 44(2), pages 205-16, June. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Meredith Fowlie, 2008. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," NBER Working Papers 14421, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Janssen, Matthias & Wobben, Magnus, 2008. "Electricity Pricing and Market Power - Evidence from Germany," MPRA Paper 11400, University Library of Munich, Germany. [Downloadable!]
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