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

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  • Holmberg, P.
  • Newbery, D.

Abstract

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.

Suggested Citation

  • Holmberg, P. & Newbery, D., 2010. "The Supply Function Equilibrium and its Policy Implications for Wholesale Electricity Auctions," Cambridge Working Papers in Economics 1016, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1016
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Wholesale electricity markets; supply function equilibria; auction design; competition policy; market regulation;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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