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Supply Function Equilibria in Networks with Transport Constraints

  • Holmberg, Pär

    ()

    (Research Institute of Industrial Economics (IFN))

  • Philpott, Andrew

    (Department of Engineering Science)

Transport constraints limit competition and arbitrageurs' possibilities of exploiting price differences between goods in neighbouring markets, especially when storage capacity is negligible. We analyse this in markets where strategic producers compete with supply functions, as in wholesale electricity markets. For networks with a radial structure, we show that existence of supply function equilibria (SFE) is ensured if demand shocks are suffciently evenly distributed, and solve for SFE in symmetric radial networks with uniform multi-dimensional nodal demand shocks. An equilibrium offer in such networks is identical to an SFE offer in an isolated node where the symmetric number of firms has been scaled by a market integration factor, the expected number of nodes that are completely integrated with a node in the symmetric network. The analysis can be extended to mesh networks (as in electricity systems) although the resulting models do not simplify as in the radial case.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 945.

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Length: 45 pages
Date of creation: 18 Dec 2012
Date of revision:
Handle: RePEc:hhs:iuiwop:0945
Contact details of provider: Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
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Fax: +46 8 665 4599
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  1. Xavier Vives, 2009. "Strategic Supply Function Competition with Private Information," Cowles Foundation Discussion Papers 1736, Cowles Foundation for Research in Economics, Yale University.
  2. Anderson, E.J. & Holmberg, P. & Philpott, A.B., 2009. "Mixed strategies in discriminatory divisible-good auctions," Working Papers 9 OMEWP, University of Sydney Business School, Discipline of Business Analytics.
  3. Newbery, D. M., 1997. "Competition, Contracts and Entry in the Electricity Spot Market," Cambridge Working Papers in Economics 9707, Faculty of Economics, University of Cambridge.
  4. Holmberg, P. & Newbery, D., 2010. "The Supply Function Equilibrium and its Policy Implications for Wholesale Electricity Auctions," Cambridge Working Papers in Economics 1016, Faculty of Economics, University of Cambridge.
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  8. Neuhoff, Karsten & Barquin, Julian & Boots, Maroeska G. & Ehrenmann, Andreas & Hobbs, Benjamin F. & Rijkers, Fieke A.M. & Vazquez, Miguel, 2005. "Network-constrained Cournot models of liberalized electricity markets: the devil is in the details," Energy Economics, Elsevier, vol. 27(3), pages 495-525, May.
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  15. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  16. Holmberg, Par, 2008. "Unique supply function equilibrium with capacity constraints," Energy Economics, Elsevier, vol. 30(1), pages 148-172, January.
  17. Borenstein, Severin & Bushnell, James & Knittel, Chris, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," Staff General Research Papers 31548, Iowa State University, Department of Economics.
  18. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  19. Bolle, Friedel, 1992. "Supply function equilibria and the danger of tacit collusion : The case of spot markets for electricity," Energy Economics, Elsevier, vol. 14(2), pages 94-102, April.
  20. Laussel, Didier, 1992. "Strategic Commercial Policy Revisited: A Supply-Function Equilibrium Model," American Economic Review, American Economic Association, vol. 82(1), pages 84-99, March.
  21. Aleksandr Rudkevich & Max Duckworth & Richard Rosen, 1998. "Modeling Electricity Pricing in a Deregulated Generation Industry: The Potential for Oligopoly Pricing in a Poolco," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 19-48.
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