Supply Function Equilibria with Capacity Constraints and Pivotal Suppliers

Talat Genc and Stanley Reynolds

No 1007, Working Papers from University of Guelph, Department of Economics and Finance

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.

Keywords: supply function equilibrium; pivotal firm; wholesale electricity market (search for similar items in EconPapers)
JEL-codes: D43 L11 L94 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2010
New Economics Papers: this item is included in nep-com and nep-ene
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Supply function equilibria with capacity constraints and pivotal suppliers (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:gue:guelph:2010-07.

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