In most electricity markets generators must submit step-function offers to a uniform price auction. These markets are often modelled as simpler pure-strategy Supply Function Equilibria (SFE) with continuous supply functions. Critics argue that the discreteness and discontinuity of the required steps drastically change Nash equilibria, invalidating predictions of the SFE model. We prove that there are sufﬁcient conditions, offered quantities can be continuously varied, offered prices are selected from a ﬁnite set, and the density of the additive demand shock is not too steep, where the resulting stepped SFE converges to the continuous SFE as the number of steps increases, reconciling the apparently very disparate approaches to modelling electricity markets.
Journal of Economic Theory
Supply Function Equilibria: Step Functions and Continuous Representations
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