Harvard Kennedy School Harvard University

Search this site

Faculty Research Working Paper Series
William W. Hogan
Raymond Plank Professor of Global Energy Policy
phone: (617)495-1317
fax: (617)496-1520
Polynomial Approximations and Supply Function Equilibrium Stability.
Baldick, Ross, and William W. Hogan. "Polynomial Approximations and Supply Function Equilibrium Stability." KSG Faculty Research Working Paper Series RWP05-028, March 2005.
Organized electricity markets often require submission of supply functions ahead of the realization of uncertain demand. As a model of oligopoly behavior, the Nash condition of supply function equilibrium has a natural appeal. Typically this produces a continuum of possible equilibria, presenting an equilibrium selection problem. Beyond existence, stability of an equilibrium would be an obvious criterion for selection. For affine demand and marginal costs, polynomial approximation provides an approach for analyzing the stability of unconstrained supply function equilibria. The set of stable approximation equilibria is small and its properties suggest that the set of stable exact supply function equilibria is empty.



Copyright © 2017 The President and Fellows of Harvard College