Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 812: The Supply Function Equilibrium and Its Policy Implications for Wholesale Electricity Auctions

Pär Holmberg () and David Newbery
Additional contact information
Pär Holmberg: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
David Newbery: Faculty of Economics, Postal: University of Cambridge, U.K.

Abstract: The supply function equilibrium provides a game-theoretic model of strategic bidding in oligopolistic wholesale electricity auctions. This paper presents an intuitive account of current understanding and shows how welfare losses depend on the number of firms in the market and their asymmetry. Previous results and general recommendations for divisible-good/multi-unit auctions provides guidance on the design of the auction format; setting the reservation price; the rationing rule; and restrictions on the offer curves in wholesale electricity auctions.

Keywords: Wholesale Electricity Markets; Supply Function Equilibria; Competition Policy

JEL-codes: C62; D43; D44; L94

45 pages, November 5, 2009

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