Unique Supply Function Equilibrium with Capacity Constraints

Pär Holmberg

No 2004:20, Working Paper Series from Uppsala University, Department of Economics

Abstract: 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.

Keywords: Supply function equilibrium; auction; oligopoly; capacity constraint; wholesale electricity market (search for similar items in EconPapers)
JEL-codes: D43 D44 L11 L13 L94 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2004-11-24
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Unique supply function equilibrium with capacity constraints (2008)
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