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Numerical calculation of an asymmetric supply function equilibrium with capacity constraints

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  • Holmberg, Pär

Abstract

Producers submit offer curves to a procurement auction, e.g. an electricity auction, before uncertain demand has been realised. In the supply function equilibrium (SFE), every firm commits to the offer curve that maximises its expected profit, given the offer curves of competitors. The equilibrium is given by a system of differential equations. In practice, it has been very difficult to find valid SFE, i.e. non-decreasing solutions, from this system, especially for asymmetric producers. This paper shows that valid SFE can be calculated by means of a shooting algorithm that combines numerical integration with an optimisation procedure that searches for an end-condition. Multiple/parallel shooting is used for ill-conditioned cases.

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  • Holmberg, Pär, 2009. "Numerical calculation of an asymmetric supply function equilibrium with capacity constraints," European Journal of Operational Research, Elsevier, vol. 199(1), pages 285-295, November.
    • Handle: RePEc:eee:ejores:v:199:y:2009:i:1:p:285-295
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    More about this item

    Keywords

    Auctions/bidding Game theory OR in energy Supply function equilibrium Numerical integration Shooting;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - 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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