EPRG 0824

David Newbery

Analytic Solutions for Supply Function Equilibria: Uniqueness and Stability

EPRG 0824 Non-Technical Summary | PDF

Also published in:

  • Holmberg, P., D.M. Newbery and D. Ralph (2008) ‘Supply Function Equilibria: Step functions and continuous representations’, submitted to Journal of Economic Theory

Abstract: Supply Function Equilibria (SFE) offer an attractive equilibrium concept for an electricity Pool in which all suppliers receive the market clearing price and are an important tool for examining market power. It is helpful to have analytical solutions available for simple models to explore market behaviour and to check computational solutions. This note derives analytic solutions for the symmetric case of linear and quadratic costs, and where each firm has an identical set of constant but different marginal cost technologies, as in most practical applications to data. Such stepped marginal cost schedules can replicate general marginal cost schedules to any desired degree of accuracy and hence symmetric SFEs can be solved analytically by piecing together recursively defined supply functions for general cost functions. The paper discusses the question of the uniqueness and stability of these symmetric solutions, but notes that finding asymmetric analytic solutions is generally difficult. It collects together and extends results scattered in earlier working papers to make them more accessible.

Keywords: Supply function equilibria analytic solutions, electricity markets, stability, uniqueness

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