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Unique Supply Function Equilibrium with Capacity Constraints

  • Holmberg, Pär

    ()

    (Department of Economics)

Consider a market where producers submit supply functions to a procurement auction — e.g. an electric power auction — under uncertainty, before demand has been realized. In the Supply Function Equilibrium (SFE), every firm commits to the supply function maximizing his expected profit given the supply functions of the competitors. The presence of multiple equilibria is one basic weakness of SFE. This paper shows that with (i) symmetric producers, (ii) inelastic demand, (iii) a reservation price, and (iiii) capacity constraints that bind with a positive probability, there is a unique symmetric SFE.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2004:20.

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Length: 31 pages
Date of creation: 24 Nov 2004
Date of revision:
Handle: RePEc:hhs:uunewp:2004_020
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Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden

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Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
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  1. 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.
  2. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October.
  3. Robert Wilson, 1979. "Auctions of Shares," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 675-689.
  4. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
  5. Skytte, Klaus, 1999. "The regulating power market on the Nordic power exchange Nord Pool: an econometric analysis," Energy Economics, Elsevier, vol. 21(4), pages 295-308, August.
  6. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-46, May.
  7. 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.
  8. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521331586, November.
  9. Holmberg, Pär, 2005. "Asymmetric Supply Function Equilibrium with Constant Marginal Costs," Working Paper Series 2005:16, Uppsala University, Department of Economics.
  10. Jaime F. Zender & James J.D. Wang, 2002. "Auctioning divisible goods," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 19(4), pages 673-705.
  11. Holmberg, Pär, 2005. "Numerical Calculation of an Asymmetric Supply Function Equilibrium with Capacity Constraints," Working Paper Series 2005:12, Uppsala University, Department of Economics.
  12. 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.
  13. 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.
  14. 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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