Working Paper Series, Department of Economics, Uppsala University
No 2004:20:
Unique Supply Function Equilibrium with Capacity Constraints
Pär Holmberg ()
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; (follow links to similar papers)
JEL-Codes: D43; D44; L11; L13; L94; (follow links to similar papers)
31 pages, November 24, 2004
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