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When calibrating spatial partial equilibrium models with conjecturalvariations, some modelers fit the suppliers' sales to the available data inaddition to total consumption and price levels. While this certainly enhancesthe quality of the calibration, it makes it difficult to accommodateuser-imposed bounds on the model parameters such as restricting the marketpower parameters to the interval [0,1], which is a common requirement inconjectural variations approaches. We propose an algorithm to calibrate thesuppliers' sales and simultaneously deal with user-defined bounds onparameters. To this end, we fix the suppliers' sales at reference values andobtain the marginal costs for each supplier and market. We then limit themarket power parameters to the interval [0,1], and calculate intervals ofanchor prices and price elasticities that reproduce the reference suppliersales in the state of equilibrium. If these intervals do not contain thereference price elasticities and prices, we face a mismatch between reality andthe model mechanics. We resolve this by altering the reference sales for thecritical suppliers, and iterate. Thereby, the user controls whether priceelasticities and anchor prices should be close to their reference values, orthe suppliers' sales. The algorithm is tested on data from the European gasmarket, and required less than one minute to identify calibrated parameters.Our algorithm is widely applicable, since it is based on mild (and common)underlying assumptions and can be configured to suit a specific purpose thanksto the inclusion of user-defined bounds on all relevant parameters.

Calibration algorithm for spatial partial equilibrium models with conjectural variations