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Supply Function Equilibrium in a Constrained Transmission System

Stanford Business School, Stanford, California 94305
rwilson{at}stanford.edu

This paper characterizes a supply function equilibrium in an auction market constrained by limited capacities of links in a transportation network and limited input/output capacities of participants. The formulation is adapted to a wholesale spot market for electricity managed by the operator of the transmission system. The results are derived using the calculus of variations to obtain the Euler conditions and the transversality conditions that characterize a Nash equilibrium in an auction in which bids are as supply functions, and quantities and payments are based either on nodal prices or pay-as-bid.

Subject classifications: industries; electric; games/group decisions; bidding/auctions; networks/graphs; applications.
History: Received March 2006; revision received January 2007; accepted January 2007.