Cournot versus Supply Functions: What Does the Data tell us?

Bert Willems, I. Rumiantseva, H. Weigt

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Abstract

The liberalization of the electricity sector increases the need for realistic and robust models of the oligopolistic interaction of electricity firms. This paper compares the two most popular models: Cournot and the Supply Function Equilibrium (SFE), and tests which model describes the observed market data best. Using identical demand and supply specifications, both models are calibrated to the German electricity market by varying the contract cover of firms. Our results show that each model explains an identical fraction of the observed price variation. We therefore suggest using Cournot models for short term analysis, as more market details, such as network constraints, can be accommodated. As the SFE model is less sensitive to the choice of the calibration parameters, it might be more appropriate for long term analysis, such as the study of a merger.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages26
Volume2007-023
Publication statusPublished - 2007

Publication series

NameTILEC Discussion Paper
Volume2007-023

Keywords

  • supply function equilibrium
  • Cournot competition
  • electricity markets

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    Willems, B., Rumiantseva, I., & Weigt, H. (2007). Cournot versus Supply Functions: What Does the Data tell us? (TILEC Discussion Paper; Vol. 2007-023). TILEC.