Asymmetric Supply Function Equilibrium with Constant Marginal Costs

Abstract:

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. FirmsÕ capacity constraints bind at different prices. Still, firms with non-binding capacity constraints have smooth residual demand. 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.

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Last updated on 07/21/2021