Cournot versus Supply Functions: What does the data tell us?
This paper compares two popular models of oligopolistic electricity markets, Cournot and the Supply Function Equilibrium (SFE), and then tests which model best describes the observed market data. Using identical demand and supply specifications, both models are calibrated to the German electricity market by varying the contract cover of firms. Our results show that each model explains almost the same fractions of the observed price variations. We therefore suggest using Cournot models for short-term analysis, since these models can accommodate additional market details, such as network constraints, and the SFE model for long-term analysis (e.g., the study of a merger) since it is less sensitive to the calibration parameters selected.
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