Cournot versus Supply Functions

What Does the Data tell us?

Bert Willems, I. Rumiantseva, H. Weigt

Research output: Working paperDiscussion paperOther research output

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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

Fingerprint

Cournot
Cournot model
Supply function equilibrium
Calibration
Demand and supply
Electricity
Electricity market
Model specification
Liberalization
Electricity sector
Mergers
Market data
Interaction

Keywords

  • supply function equilibrium
  • Cournot competition
  • electricity markets

Cite this

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

Cournot versus Supply Functions : What Does the Data tell us? / Willems, Bert; Rumiantseva, I.; Weigt, H.

Tilburg : TILEC, 2007. (TILEC Discussion Paper; Vol. 2007-023).

Research output: Working paperDiscussion paperOther research output

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AB - 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.

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