The role of market pricing mechanism under imperfect competition

Abstract

This paper illustrates how a supplier profit may be affected by the market pricing mechanism under imperfect competition. A parameterized Supply Function Equilibrium (SFE) model involving manipulation of the sole intercept is used to represent the strategic behavior of each supplier. Through utilizing a bilevel optimization technique and a Mathematical Program with Equilibrium Constraints (MPECs) approach, market equilibria are calculated and compared under pay-as-bid pricing (PABP) and marginal pricing (MP) mechanisms. For an unconstrained case, analytically it is demonstrated that the optimal bidding strategy and the maximum profit of each supplier, as well as the market clearing price are the same under PABP and MP. The effects of the transmission limits and the supplier capacity constraints are discussed through numerical results. © 2007 Elsevier B.V. All rights reserved.

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