Supply function equilibria with capacity constraints and pivotal suppliers

Talat S. Genc, Stanley S. Reynolds

Research output: Contribution to journalArticle

31 Scopus citations

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 fully considered 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.

Original languageEnglish (US)
Pages (from-to)432-442
Number of pages11
JournalInternational Journal of Industrial Organization
Volume29
Issue number4
DOIs
StatePublished - Jul 1 2011

Keywords

  • Pivotal firm
  • Supply function equilibrium
  • Wholesale electricity market

ASJC Scopus subject areas

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

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