Supply Function Equilibria in Networks with Transport Constraints

73 Pages Posted: 19 Dec 2012 Last revised: 12 Aug 2015

See all articles by Par Holmberg

Par Holmberg

Research Institute of Industrial Economics (IFN)

Andrew Philpott

University of Auckland - Department of Engineering Science

Date Written: August 10, 2015

Abstract

Transport constraints limit competition and arbitrageurs' possibilities of exploiting price differences between goods in neighbouring markets, especially when storage capacity is negligible. We analyse this in markets where strategic producers compete with supply functions, as in wholesale electricity markets. For networks with a radial structure, we show that existence of supply function equilibria (SFE) is ensured if demand shocks are sufficiently evenly distributed, and solve for SFE in symmetric radial networks with uniform multi-dimensional nodal demand shocks. An equilibrium offer in such networks is identical to an SFE offer in an isolated node where the symmetric number of firms has been scaled by a market integration factor, the expected number of nodes that are completely integrated with a node in the symmetric network. The analysis can be extended to mesh networks (as in electricity systems) although the resulting models do not simplify as in the radial case.

Keywords: Oligopoly market, Divisible-good auction, Transmission network, Graph theory, Market integration, Wholesale electricity markets

JEL Classification: D43, D44, C72, L91

Suggested Citation

Holmberg, Par and Philpott, Andrew, Supply Function Equilibria in Networks with Transport Constraints (August 10, 2015). IFN Working Paper No. 945. Available at SSRN: https://ssrn.com/abstract=2190826 or http://dx.doi.org/10.2139/ssrn.2190826

Par Holmberg (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Andrew Philpott

University of Auckland - Department of Engineering Science ( email )

Private Bag 92019
Auckland
New Zealand

Register to save articles to
your library

Register

Paper statistics

Downloads
43
Abstract Views
765
PlumX Metrics