Professional Documents
Culture Documents
Fernando L. Alvarado
Professor, The University of Wisconsin
Price
Demand (inelastic)
Maximum
available
power
Available supply
Demand (inelastic)
Maximum
available
power
Available supply
Quantity (power)
Generator 6
Generator 5
Generator 2
Generator 1
Generator 3
Generator 4
Old
Outaged supply
generator limit
New
supply
limit
Probability p1
n-1 secure
insecure
Generator 2A
December 4, 2000
Generator 3A
Generator 4A Secure
System A
Generator 5A
Low price
Generator 6A
Generator 1B
Generator 3B
System B
Generator 4B
High price
n-1 insecure
Generator 5B
10
System B
System A
High price
Low price n-1 secure
n-1 secure
Low price
n-1 secure
Demand
Supplier a generator 2
Supplier a generator 1
Other suppliers
blue supplier
Surplus for
red supplier
Surplus for
Withheld
generator
Clearing
Now it is not possible for red
price
supplier to withhold and gain
December 4, 2000 © 2000 Fernando L. Alvarado 23
If demand is uncertain Probability p that
withholding will
result in surplus
2
Price
P1
price 1
Quantity (power)
Surplus
With n=1, there is no surplus
Surplus with n=2
Demand level
l i er
upp
s
es
r
10 supplie
s
n
lie r
ier
O
pl
upp
up
2s
3s
Demand
December 4, 2000 © 2000 Fernando L. Alvarado 30
Effect of demand uncertainty on fixed cost recovery
Period during which
fixed cost recovery
can take place
Price
Demand
December 4, 2000 © 2000 Fernando L. Alvarado 31
Price The effect of demand uncertainty on fixed cost recovery
Demand
December 4, 2000 © 2000 Fernando L. Alvarado 32
Numerical studies
• Demand is 60/70/80/90/95% of “knee”
• for demand varies from 0 to 20%
• Demand probability distribution is normal
• Supplier has equal size units available
• There are 3/6/10/15/ suppliers
We illustrate the fixed costs that can be recovered
for each of the case combinations above according
to our earlier withholding assumptions
December 4, 2000 © 2000 Fernando L. Alvarado 33
Fixed cost recovery without market power ( suppliers)
250
95%
100
90%
50
80%
0
0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
160
90%
95%
demand levels, some
demand variance
140
is essential for
120 cost recovery
100
80
60
40
20
0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)
200
For high enough demand levels
cost recovery is possible
150 even without demand
variance
60%
100 70%
80%
90%
95%
50
0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)
250
200
For high demand levels
demand variance can become
irrelevant
150
60%
70%
80%
100 90%
95%
50
0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)
300
250
200
60%
100
fixed costs
50
0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)
350
300
100
50
0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)
350
60%
300 70%
80%
90%
250 95%
200
With three or less suppliers, it becomes feasible
150 at high variances to recover fixed costs by
100
withholding at low demand
50
0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)
35
30
25
20
At low demand and low
variance it is impossible
to recover fixed costs
15
10
0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)
80
60
40
At higher demand with 3 suppliers
it is possible to recover
20
costs at low variance
0
0 2 4 6 8 10 12 14 16 18 20
Dem and V ariance (percent)
300
suppliers
250 profitable even when there are many suppliers
15 suppliers
10 suppliers
150 6 suppliers
4 suppliers
200 3 suppliers
suppliers
15 suppliers
100 10 suppliers
150
6 suppliers
4 suppliers
3 suppliers
100
50
50
0
0 2 4 6 8 10 12 14 16 18 20
0
0 2 4 6 Dem and
8 V ariance
10 (percent)
12 14 16 18 20
Dem and V ariance (percent)
350
300
250
200
150
100
Only in the case suppliers
15 suppliers
10 suppliers
50
of infinite suppliers is it 6 suppliers
4 suppliers
0
impossible to recover costs 3 suppliers
0 2 4 6 8 10 12 14 16 18 20
Dem and V ariance (percent)