Analysis of a duopoly supply chain and its application in electricity spot markets

This paper studies a supply chain consisting of two suppliers and one retailer in a spot market, where the retailer uses the newsvendor solution as its purchase policy, and suppliers compete for the retailer's purchase. Since each supplier's bidding strategy affects the other's profit, a game theory approach is used to identify optimal bidding strategies. We prove the existence and uniqueness of a Nash solution. It is also shown that the competition between the supplier leads to a lower market clearing price, and as a result, the retailer benefits from it. Finally, we demonstrate the applicability of the obtained results by deriving optimal bidding strategies for power generator plants in the deregulated California energy market.