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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Interdisciplinary European Studies

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This book explores how the European Union responds to the ongoing challenges to the liberal international order. These challenges arise both within the EU itself and beyond its borders, and put into question the values of free trade and liberal democracy.

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