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Stability of supply function equilibria implications for daily versus hourly bids in a poolco market

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  • Ross Baldick

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  • William Hogan

Abstract

We consider a supply function model of a poolco electricity market where demand varies significantly over a time horizon such as a day and also has a small responsiveness to price. Although there are equilibria yielding prices at peak that are close to Cournot prices, it is known that the wider the range of demand uncertainty the narrower the range of such supply function equilibria. Here we show that such equilibria are also typically unstable and consequently would be difficult to sustain in practice. This strengthens the results of Green and Newbery by ruling out many equilibria that have high prices. We demonstrate this result both theoretically under somewhat restrictive assumptions and also numerically using both a three-firm example system and a five-firm example system having generation capacity constraints. Hence, this reinforces the conclusion that the market outcome is significantly influenced by a requirement that offers into the poolco be consistent over the time horizon. This result contrasts with markets where bids can be changed on an hourly basis, where Cournot prices are possible outcomes. The stability analysis has important policy implications for the design of day-ahead electricity markets. The stability perspective also provides a narrowing of the equilibrium selection that strengthens empirical analysis. Copyright Springer Science+Business Media, LLC 2006

Suggested Citation

  • Ross Baldick & William Hogan, 2006. "Stability of supply function equilibria implications for daily versus hourly bids in a poolco market," Journal of Regulatory Economics, Springer, vol. 30(2), pages 119-139, August.
  • Handle: RePEc:kap:regeco:v:30:y:2006:i:2:p:119-139
    DOI: 10.1007/s11149-006-0017-2
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    References listed on IDEAS

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    1. Donald A. Walker (ed.), 2000. "Equilibrium," Books, Edward Elgar Publishing, volume 0, number 1585.
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    Cited by:

    1. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    2. Boffa, Federico & Pingali, Viswanath & Vannoni, Davide, 2010. "Increasing market interconnection: An analysis of the Italian electricity spot market," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 311-322, May.
    3. Hunt Allcott, 2012. "The Smart Grid, Entry, and Imperfect Competition in Electricity Markets," NBER Working Papers 18071, National Bureau of Economic Research, Inc.
    4. Crawford, Gregory S. & Crespo, Joseph & Tauchen, Helen, 2007. "Bidding asymmetries in multi-unit auctions: Implications of bid function equilibria in the British spot market for electricity," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1233-1268, December.
    5. Boffa, Federico & Pingali, Viswanath & Vannoni, Davide, 2010. "Increasing market interconnection: An analysis of the Italian electricity spot market," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 311-322, May.
    6. repec:tur:wpaper:4 is not listed on IDEAS

    More about this item

    Keywords

    Stability of equilibrium; Oligopoly models; Electricity markets; Supply function equilibrium; C62; D43; D58; L13; L51; L94;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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