Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/81380
Authors: 
Holmberg, Pär
Newbery, David
Ralph, Daniel
Year of Publication: 
2009
Series/Report no.: 
IFN Working Paper 788
Abstract: 
In most wholesale electricity markets generators must submit step-function offers of supply to a uniform price auction, and the market is cleared at the price of the most expensive offer needed to meet realised demand. Such markets can most elegantly be modelled as the pure-strategy, Nash Equilibrium of continuous supply functions, in which each supplier has a unique profit maximising choice of supply function given the choices of other suppliers. Critics argue that the discreteness and discontinuity of the required steps can rule out pure-strategy equilibria and may result in price instability. This paper argues that if prices must be selected from a finite set the resulting step function converges to the continuous supply function as the number of steps increases, reconciling the apparently very disparate approaches to modelling electricity markets.
Subjects: 
Auctions
Supply Function Equilibria
Convergence of Step-Functions
Electricity Markets
JEL: 
C62
D43
D44
L11
L13
L94
Document Type: 
Working Paper

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