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Supply Function Equilibrium with Asymmetric Capacities and Constant Marginal Costs

This paper analytically derives a Supply Function Equilibrium (SFE) of a real-time electricity market with multiple firms and asymmetric production capacities. There is a unique SFE, which is piece-wise symmetric when firms have identical constant marginal costs. It is believed that some of the properties of the derived SFE are valid for real-time markets in general. Firms� capacity constraints bind at different prices (i). Still, firms with non-binding capacity constraints have smooth residual demand (ii). Approximating an asymmetric real-time market with a symmetric one, tends to overestimate mark-ups for small positive imbalances and underestimate mark-ups for large positive imbalances (iii).

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Local Distribution; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
D44 - Auctions
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Supply Function Equilibrium, uniform-price auction uniqueness, asymmetry, oligopoly, capacity constraint, wholesale electricity, market

DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No2-3

Published in Volume 28, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.