The concept of a supply function equilibrium (SFE) has been widely used to model
generators' bidding behavior and market power issues in wholesale electricity markets.
Observers of electricity markets have noted how generation capacity constraints may
contribute to market power of generation firms. If a generation firm's rivals are capacity
constrained then the firm may be pivotal; that is, the firm could substantially raise the market
price by unilaterally withholding output. However the SFE literature has not fully considered …