2006–2010

Unique Supply Function Equilibrium with Capacity Constraints

Reprint No. 2008:2

Author(s): Pär HolmbergYear: 2008 Title: Energy Economics Volume (No.): 30 (1) Pages: 148–172


Consider a market where producers submit supply functions to a procurement auction with uncertain demand, e.g. an electricity auction. In the Supply Function Equilibrium (SFE), every firm commits to the supply function that maximises expected profit in the one-shot game given the supply functions of competitors. A basic weakness of the SFE is the presence of multiple equilibria. This paper shows that with (i) symmetric producers, (ii) perfectly inelastic demand, (iii) a price cap, and (iv) capacity constraints that bind with a positive probability, there exists a unique, symmetric SFE.


Reference:
Holmberg, Pär (2008), "Unique Supply Function Equilibrium with Capacity Constraints". Energy Economics 30(1), 148–172.

Pär Holmberg

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The authors of this book, Niklas Elert, Magnus Henrekson and Mikael Stenkula, advise the economies of the European Union to become more entrepreneurial in promoting innovation and economic growth. The authors propose a reform strategy with respect to several aspects to achieve this goal.

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