Unique Supply Function Equilibrium with Capacity Constraints
AbstractConsider a market where producers submit supply functions to a procurement auction — e.g. an electric power auction — under uncertainty, before demand has been realized. In the Supply Function Equilibrium (SFE), every firm commits to the supply function maximizing his expected profit given the supply functions of the competitors. The presence of multiple equilibria is one basic weakness of SFE. This paper shows that with (i) symmetric producers, (ii) inelastic demand, (iii) a reservation price, and (iiii) capacity constraints that bind with a positive probability, there is a unique symmetric SFE.
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Bibliographic InfoPaper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2004:20.
Length: 31 pages
Date of creation: 24 Nov 2004
Date of revision:
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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
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Supply function equilibrium; auction; oligopoly; capacity constraint; wholesale electricity market;
Other versions of this item:
- Holmberg, Par, 2008. "Unique supply function equilibrium with capacity constraints," Energy Economics, Elsevier, vol. 30(1), pages 148-172, January.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
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