Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129646
Authors: 
Anderson, Edward
Holmberg, Pär
Year of Publication: 
2015
Series/Report no.: 
IFN Working Paper 1095
Abstract: 
We consider a procurement auction, where each supplier has private costs and submits a stepped supply function. We solve for a Bayesian Nash equilibrium and show that the equilibrium has a price instability in the sense that a minor change in a supplier.s cost sometimes result in a major change in the market price. In wholesale electricity markets, we predict that the bid price of the most expensive production unit can change by 1-10% due to price instability. The price instability is reduced when suppliers have more steps in their supply functions for a given production technology. In the limit, as the number of steps increases and the cost uncertainty decreases, the Bayesian equilibrium converges to a pure-strategy NE without price instability, the Supply Function Equilibrium (SFE).
Subjects: 
Multi-unit auctions
indivisible unit
price instability
Bayesian Nash equilibria
supply function equilibria
convergence of Nash equilibria
whole-sale electricity markets
JEL: 
C62
C72
D43
D44
L94
Document Type: 
Working Paper

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