Escolar Documentos
Profissional Documentos
Cultura Documentos
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)