Supply Function Equilibria with Capacity Constraints and Pivotal Suppliers
AbstractThe concept of a supply function equilibrium (SFE) has been widely used to model generators’ bidding behavior and market power issues in wholesale electricity markets. Observers of electricity markets have noted how generation capacity constraints may contribute to market power of generation firms. If a generation firm’s rivals are capacity constrained then the firm may be pivotal; that is, the firm could substantially raise the market price by unilaterally withholding output. However the SFE literature has not properly analyzed the impact of capacity constraints and pivotal firms on equilibrium predictions. We characterize the set of symmetric supply function equilibria for uniform price auctions when firms are capacity constrained and show that this set is increasing as capacity per firm rises. We provide conditions under which asymmetric equilibria exist and characterize these equilibria. In addition, we compare results for uniform price auctions to those for discriminatory auctions, and we compare our SFE predictions to equilibrium predictions of models in which bidders are constrained to bid on discrete units of output.
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Bibliographic InfoPaper provided by University of Guelph, Department of Economics and Finance in its series Working Papers with number 1007.
Length: 35 pages
Date of creation: 2010
Date of revision:
supply function equilibrium; pivotal firm; wholesale electricity market;
Other versions of this item:
- Genc, Talat S. & Reynolds, Stanley S., 2011. "Supply function equilibria with capacity constraints and pivotal suppliers," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 432-442, July.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-20 (All new papers)
- NEP-COM-2010-11-20 (Industrial Competition)
- NEP-ENE-2010-11-20 (Energy Economics)
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