Cournot versus supply functions: what does the data tell us?

Bert Willems, Ina Rumiantseva and Hannes Weigt

Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: The liberalization of the electricity sector increases the need for realistic and robust models of the oligopolistic interaction of electricity firms. This paper compares the two most popular models: Cournot and the Supply Function Equilibrium (SFE), and tests which model describes the observed market data best. Using identical demand and supply specifications, both models are calibrated to the German electricity market by varying the contract cover of firms. Our results show that each model explains an identical fraction of the observed price variation. We therefore suggest using Cournot models for short term analysis, as more market details, such as network constraints, can be accommodated. As the SFE model is less sensitive to the choice of the calibration parameters, it might be more appropriate for long term analysis, such as the study of a merger.

Keywords: supply function equilibrium; Cournot competition; electricity markets (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 L94 (search for similar items in EconPapers)
Date: 2007-07
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Cournot versus Supply Functions: What does the data tell us? (2009)
Working Paper: Cournot Versus Supply Functions: What does the Data Tell us? (2007)
Working Paper: Cournot versus Supply Functions: What Does the Data tell us? (2007)
Working Paper: Cournot versus Supply Functions: What Does the Data tell us? (2007)
Working Paper: Cournot Versus Supply Functions: What does the Data Tell us? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ete:ceswps:ces0720

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