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Supply Function Equilibria: Step Functions and Continuous Representations

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  • Holmberg, Pär

    ()
    (Research Institute of Industrial Economics (IFN))

  • Newbery, David

    (Faculty of Economics)

  • Ralph, Daniel

    (Judge Business School)

Abstract

In most wholesale electricity markets generators must submit step-function 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 pure-strategy, 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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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 788.

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Length: 48 pages
Date of creation: 29 Jan 2009
Date of revision:
Publication status: Published as Holmberg, Pär, David Newbery and Daniel Ralph, 'Supply Function Equilibria: Step Functions and Continuous Representations' in Journal of Economic Theory, 2013, pages 1509-1551.
Handle: RePEc:hhs:iuiwop:0788

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Related research

Keywords: Auctions; Supply Function Equilibria; Convergence of Step-Functions; Electricity Markets;

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References

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Citations

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Cited by:
  1. Holmberg, Pär & Willems, Bert, 2012. "Relaxing Competition through Speculation: Committing to a Negative Supply Slope," Working Paper Series 937, Research Institute of Industrial Economics.
  2. Holmberg, Pär & Newbery, David, 2009. "The Supply Function Equilibrium and Its Policy Implications for Wholesale Electricity Auctions," Working Paper Series 812, Research Institute of Industrial Economics.
  3. Xavier Vives, 2008. "Strategic Supply Function Competition with Private Information," CESifo Working Paper Series 2410, CESifo Group Munich.
  4. 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, vol. 18(2), pages 35-60.
  5. Holmberg, Pär & Newbery, David & Ralph, Daniel, 2009. "Supply Function Equilibria: Step Functions and Continuous Representations," Working Paper Series 788, Research Institute of Industrial Economics.
  6. David Hudgins, 2012. "Optimal Willingness to Supply Wholesale Electricity under Asymmetric Linearized Marginal Costs," International Journal of Energy Economics and Policy, Econjournals, vol. 2(4), pages 307-317.
  7. Pepermans, Guido & Willems, Bert, 2010. "Cost Recovery in Congested Electricity Networks," Working Papers 2010/22, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
  8. Bolle, Friedel & Grimm, Veronika & Ockenfels, Axel & del Pozo, Xavier, 2013. "An experiment on supply function competition," European Economic Review, Elsevier, vol. 63(C), pages 170-185.

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