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Working Paper No. 812

The Supply Function Equilibrium and Its Policy Implications for Wholesale Electricity Auctions

Working Paper
Reference
Holmberg, Pär and David Newbery (2009). “The Supply Function Equilibrium and Its Policy Implications for Wholesale Electricity Auctions”. IFN Working Paper No. 812. Stockholm: Research Institute of Industrial Economics (IFN).

Authors
Pär Holmberg, David Newbery

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.
 

Pär Holmberg

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+46 (0)72 511 6866
par.holmberg@ifn.se