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Supply Function Equilibria with Capacity Constraints and Pivotal Suppliers

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Listed author(s):
  • Talat S. Genc

    ()

    (Department of Economics,University of Guelph)

  • Stanley S. Reynolds

    ()

    (Department of Economics,University of Arizona)

Abstract

The concept of a supply function equilibrium (SFE) has been widely used to model generators’ bidding behavior and market power issues in wholesale electricity markets. Observers of electricity markets have noted how generation capacity constraints may contribute to market power of generation firms. If a generation firm’s rivals are capacity constrained then the firm may be pivotal; that is, the firm could substantially raise the market price by unilaterally withholding output. However the SFE literature has not properly analyzed the impact of capacity constraints and pivotal firms on equilibrium predictions. We characterize the set of symmetric supply function equilibria for uniform price auctions when firms are capacity constrained and show that this set is increasing as capacity per firm rises. We provide conditions under which asymmetric equilibria exist and characterize these equilibria. In addition, we compare results for uniform price auctions to those for discriminatory auctions, and we compare our SFE predictions to equilibrium predictions of models in which bidders are constrained to bid on discrete units of output.

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File URL: http://www.uoguelph.ca/economics/repec/workingpapers/2010/2010-07.pdf
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Paper provided by University of Guelph, Department of Economics and Finance in its series Working Papers with number 1007.

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Length: 35 pages
Date of creation: 2010
Handle: RePEc:gue:guelph:2010-07.
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Guelph, Ontario, N1G 2W1

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Web page: https://www.uoguelph.ca/economics/

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Keywords: supply function equilibrium; pivotal firm; wholesale electricity market;

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Find related papers by JEL classification:
  • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
  • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
  • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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  1. Natalia Fabra & Nils‐Henrik Fehr & David Harbord, 2006. "Designing electricity auctions," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 23-46, 03.
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Cited by:

  1. Holmberg, Pär & Wolak, Frank A., 2015. "Electricity Markets: Designing Auctions Where Suppliers Have Uncertain Costs," Working Paper Series 1099, Research Institute of Industrial Economics.
  2. Jordi Brandts & Stanley S. Reynolds & Arthur Schram, 2014. "Pivotal Suppliers and Market Power in Experimental Supply Function Competition," Economic Journal, Royal Economic Society, vol. 124(579), pages 887-916, 09.
  3. Graf, Christoph & Wozabal, David, 2013. "Measuring competitiveness of the EPEX spot market for electricity," Energy Policy, Elsevier, vol. 62(C), pages 948-958.
  4. Bosco, Bruno & Parisio, Lucia & Pelagatti, Matteo, 2013. "Price-capping in partially monopolistic electricity markets with an application to Italy," Energy Policy, Elsevier, vol. 54(C), pages 257-266.
  5. Holmberg, Pär & Newbery, David & Ralph, Daniel, 2013. "Supply function equilibria: Step functions and continuous representations," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1509-1551.
  6. Bolle, Friedel & Grimm, Veronika & Ockenfels, Axel & del Pozo, Xavier, 2013. "An experiment on supply function competition," European Economic Review, Elsevier, vol. 63(C), pages 170-185.
  7. Edward Anderson & Pär Holmberg, 2015. "Price Instability in Multi-Unit Auctions," Cambridge Working Papers in Economics 1538, Faculty of Economics, University of Cambridge.
  8. Li, Sijie & Zhu, Zhanbei & Huang, Lihua, 2009. "Supply chain coordination and decision making under consignment contract with revenue sharing," International Journal of Production Economics, Elsevier, vol. 120(1), pages 88-99, July.
  9. Eiji Sawada, 2016. "Effect of electricity system reform on retail electricity price increases in Japan," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 5(1), pages 1-14, December.
  10. David Hudgins, 2012. "Optimal Willingness to Supply Wholesale Electricity under Asymmetric Linearized Marginal Costs," International Journal of Energy Economics and Policy, Econjournals, vol. 2(4), pages 307-317.
  11. Nie, Pu-yan & Chen, You-hua, 2012. "Duopoly competitions with capacity constrained input," Economic Modelling, Elsevier, vol. 29(5), pages 1715-1721.
  12. Genc, Talat S., 2016. "Measuring demand responses to wholesale electricity prices using market power indices," Energy Economics, Elsevier, vol. 56(C), pages 247-260.
  13. Li, Gong & Shi, Jing & Qu, Xiuli, 2011. "Modeling methods for GenCo bidding strategy optimization in the liberalized electricity spot market–A state-of-the-art review," Energy, Elsevier, vol. 36(8), pages 4686-4700.
  14. Pu-yan Nie, 2014. "Effects of capacity constraints on mixed duopoly," Journal of Economics, Springer, vol. 112(3), pages 283-294, July.

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