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Supply Function Equilibria with Capacity Constraints and Pivotal Suppliers

  • Talat S. Genc

    ()

    (Department of Economics,University of Guelph)

  • Stanley S. Reynolds

    ()

    (Department of Economics,University of Arizona)

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
Date of revision:
Handle: RePEc:gue:guelph:2010-07.
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  2. Ahmed Anwar, 2004. "The Case for a Discriminatory Pricing Rule in Competitive Electricity Pools," ESE Discussion Papers 39, Edinburgh School of Economics, University of Edinburgh.
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  16. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
  17. Ilan Kremer & Kjell G. Nyborg, 2004. "Divisible-Good Auctions: The Role of Allocation Rules," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 147-159, Spring.
  18. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
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