Unique supply function equilibrium with capacity constraints (2008)

In electricity auctions producers submit supply functions specifying the amount they are willing to produce at various prices. In Supply Function Equilibrium (SFE), every firm commits to the supply function that maximises expected profit given the supply functions of the competitors. A basic weakness of the SFE is the presence of multiple equilibria. This paper shows that there is unique equilibrium if capacity constraints in the market bind with a positive probability. The equilibrium is determined by the price cap and the market capacity.