Supply Function Equilibria: Step Functions and Continuous Representations

Pär Holmberg, David M Newbery and Daniel Ralph

No 788, Working Paper Series from Research Institute of Industrial Economics

Abstract: In most wholesale electricity markets generators must submit step-function offers of supply to a uniform price auction, and the market is cleared at the price of the most expensive offer needed to meet realised demand. Such markets can most elegantly be modelled as the pure-strategy, Nash Equilibrium of continuous supply functions, in which each supplier has a unique profit maximising choice of supply function given the choices of other suppliers. Critics argue that the discreteness and discontinuity of the required steps can rule out pure-strategy equilibria and may result in price instability. This paper argues that if prices must be selected from a finite set the resulting step function converges to the continuous supply function as the number of steps increases, reconciling the apparently very disparate approaches to modelling electricity markets.

Keywords: Auctions; Supply Function Equilibria; Convergence of Step-Functions; Electricity Markets (search for similar items in EconPapers)
JEL-codes: C62 D43 D44 L11 L13 L94 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2009-01-29
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (27)

Published as Holmberg, Pär, David Newbery and Daniel Ralph, 'Supply Function Equilibria: Step Functions and Continuous Representations' in Journal of Economic Theory, 2013, pages 1509-1551.

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Related works:
Journal Article: Supply function equilibria: Step functions and continuous representations (2013)
Working Paper: Supply Function Equilibria: Step Functions and Continuous Representations (2008)
Working Paper: Supply Function Equilibria: Step functions and continuous representations (2008)
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