Parameterized Supply Function Bidding: Equilibrium and Efficiency
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P-08-supply_game-rev.pdf
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272.07 KB
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Adobe PDF
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6f25d102eddf42c2b4b602ebd916b192
Author(s)
Johari, Ramesh
Tsitsiklis, John N.
Date Issued
November 2011
Journal
Operations Research
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Citation
Johari, R., and J. N. Tsitsiklis. Parameterized Supply Function Bidding: Equilibrium and Efficiency. Operations Research 59, no. 5 (November 15, 2011): 1079-1089.
Version
Author's final manuscript
Abstract
We consider a model where a finite number of producers compete to meet an infinitely divisible but inelastic demand for a product. Each firm is characterized by a production cost that is convex in the output produced, and firms act as profit maximizers. We consider a uniform price market design that uses supply function bidding: firms declare the amount they would supply at any positive price, and a single price is chosen to clear the market. We are interested in evaluating the impact of price-anticipating behavior both on the allocative efficiency of the market and on the prices seen at equilibrium. We show that by restricting the strategy space of the firms to parameterized supply functions, we can provide upper bounds on both the inflation of aggregate cost at the Nash equilibrium relative to the socially optimal level, as well as the markup of the Nash equilibrium price above the competitive level: as long as N > 2 firms are competing, these quantities are both upper bounded by 1 + 1/(N − 2). This result holds even in the presence of asymmetric cost structure across firms. We also discuss several extensions, generalizations, and related issues.
MIT Department
Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science
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Creative Commons Attribution-Noncommercial-Share Alike 3.0
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DOI of Published Version
https://doi.org/10.1287/opre.1110.0980
