Supply Function Equilibria in Networks with Transport Constraints
AbstractTransport constraints limit competition and arbitrageurs' possibilities of exploiting price differences between goods in neighbouring markets, especially when storage capacity is negligible. We analyse this in markets where strategic producers compete with supply functions, as in wholesale electricity markets. For networks with a radial structure, we show that existence of supply function equilibria (SFE) is ensured if demand shocks are suffciently evenly distributed, and solve for SFE in symmetric radial networks with uniform multi-dimensional nodal demand shocks. An equilibrium offer in such networks is identical to an SFE offer in an isolated node where the symmetric number of firms has been scaled by a market integration factor, the expected number of nodes that are completely integrated with a node in the symmetric network. The analysis can be extended to mesh networks (as in electricity systems) although the resulting models do not simplify as in the radial case.
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Bibliographic InfoPaper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 945.
Length: 45 pages
Date of creation: 18 Dec 2012
Date of revision:
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Transmission network; Graph theory; Market integration; Wholesale electricity markets;
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-07 (All new papers)
- NEP-COM-2013-01-07 (Industrial Competition)
- NEP-ENE-2013-01-07 (Energy Economics)
- NEP-GTH-2013-01-07 (Game Theory)
- NEP-MIC-2013-01-07 (Microeconomics)
- NEP-NET-2013-01-07 (Network Economics)
- NEP-TRE-2013-01-07 (Transport Economics)
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