137 The Energy Journal, Vol. 31, No. 4, Copyright 2010 by the IAEE. All rights reserved. * Department of Economic Analysis II, University of the Basque Country, Avda. Lehendakari Aguirre 83, Bilbao 48015, Spain. † Corresponding author. E-mail: aitor.ciarreta@ehu.es Financial support from Ministerio de Ciencia e Innovacio ´n (SEJ2006-06309 and ECO2009-09120), Gobierno Vasco DEUI (IT-313-07), BBVA and IVIE is gratefully acknowledged. We thank Jorge de la Cruz for his helpful research assistance, and seminar participants at the IDEI Conference on Com- petition and Coordination in the Electricity Industry (Toulouse), Universidad Auto ´ noma de Barcelona and Universidad de Alicante, the editor and three anonymous referees for comments and suggestions. We are especially indebted to Eva Ferreira, M. Cruz Loyo and Enrique Pastor for their invaluable 1. Appendix 1 gives a brief description of the day-ahead market. An overview can be found in Crampes and Fabra (2005). Supply Function Competition in the Spanish Wholesale Electricity Market Aitor Ciarreta*† and Maria Paz Espinosa* We represent the Spanish wholesale market as a supply function com- petition model. Theoretically, the larger generators’ supply curves for each plant should be to the left of the supply curves of plants owned by smaller generators. We test this prediction for fuel plants using data from the Spanish Market Op- erator (OMEL) from January 2002 to December 2005. Our empirical results are consistent with the model predictions and suggest that the supply function model better fits data than a discrete-bid auction model since large generators behave as price-makers irrespective whether they are the marginal firms at the auction. 1. INTRODUCTION In the context of European deregulation, the Spanish electricity pool (day-ahead market) started operating in January 1998. 1 The market is character- ized by a high concentration index together with inelastic demand. Two compa- nies, Endesa (EN) and Iberdrola (IB), own most of the generating capacity, while Union Fenosa (UF), Hidrocantabrico (HC) and Viesgo (VI) are smaller compet- itors; all are private companies and each owns nuclear and thermal plants, as well