Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2005:12: Numerical Calculation of an Asymmetric Supply Function Equilibrium with Capacity Constraints

Pär Holmberg ()
Additional contact information
Pär Holmberg: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: Producers submit committed supply functions to a procurement auction, e.g. an electricity auction, before the uncertain demand has been realized. In the Supply Function Equilibrium(SFE), every firm chooses the bid maximizing his expected profit given the bids of the competitors. In case of asymmetric producers with general cost functions, previous work has shown that it is very difficult to find valid SFE. This paper presents a new numerical procedure that can solve the problem. It comprises numerical integration and an optimization algorithm that searches an end-condition. The procedure is illustrated by an example with three asymmetric firms.

Keywords: Supply function equilibrium; uniform-price auction; numerical integration; oligopoly; asymmetry; capacity constraint; wholesale electricity market

JEL-codes: C61; D43; D44; L11; L13; L94

18 pages, March 29, 2005

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