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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