Competitive Bidding Behavior in Uniform-Price Auction Markets

Profit-maximizing bidding in uniform price auction markets involves bidding above marginal cost. It therefore is not surprising that such behavior is observed in electricity markets. Common bidding behavior such as "hockey stick" bids easily are explained by suppliers determining their supply offers to maximize profits. This incentive to bid above marginal cost is not the result of coordinated action among the bidders. Rather, each bidder is independently selecting its bid to maximize profits based on its estimate of the residual demand curve it faces. Profit-maximizing bidding does not mean that "the sky’s the limit." Typically, bidders are limited in how high they want to bid. As prices increase, operators become increasingly concerned that their capacity will not be selected—that someone else will step in front of them in the merit order. Only when (1) demand does not respond to price, and (2) the largest unhedged block of capacity is essential to meet demand can the bidder holding this largest block profitably name any price. In all other cases, the supplier bids a price for its energy capacity to optimize its marginal tradeoff between higher prices and lower quantities. Price response from either demand or other suppliers prevents the supplier from raising its bid too much. Profit maximizing bidding should be expected and encouraged by regulators. It is precisely this profit maximizing behavior that guides the market toward long-run efficient outcomes.Auctions, Electricity Auctions, Market Design

Competitive Bidding Behavior in Uniform-Price Auction Markets

Profit-maximizing bidding in uniform price auction markets involves bidding above marginal cost. It therefore is not surprising that such behavior is observed in electricity markets. This incentive to bid above marginal cost is not the result of coordinated action among the bidders. Rather, each bidder is independently selecting its bid to maximize profits based on its estimate of the residual demand curve it faces. The supplier bids a price for its energy capacity to optimize its marginal tradeoff between higher prices and lower quantities. Price response from either demand or other suppliers prevents the supplier from raising its bid too much. Profit maximizing bidding should be expected and encouraged by regulators. It is precisely this profit maximizing behavior that guides the market toward long-run efficient outcomes.Auctions, Electricity Auctions, Market Design

Competitive Bidding Behavior in Uniform-Price Auction Markets

Profit-maximizing bidding in uniform price auction markets involves bidding above marginal cost. It therefore is not surprising that such behavior is observed in electricity markets. This incentive to bid above marginal cost is not the result of coordinated action among the bidders. Rather, each bidder is independently selecting its bid to maximize profits based on its estimate of the residual demand curve it faces. The supplier bids a price for its energy capacity to optimize its marginal tradeoff between higher prices and lower quantities. Price response from either demand or other suppliers prevents the supplier from raising its bid too much. Profit maximizing bidding should be expected and encouraged by regulators. It is precisely this profit maximizing behavior that guides the market toward long-run efficient outcomes

Two Essays On Bidding In Multi-unit Common Value Auctions

This dissertation consists of two essays on the topic of bidding in multi-unit common value auction. Essay one examines the role of capacity constraint on the auction results and bidding behavior. We consider a general case where bidders are unconstrained, and a second setting where bidders are capacity constrained. We document downward sloping demand curves for individual bidders. Bidders shade their bids by submitting quantity-price pairs and spreading their bids. The winner\u27s curse is strong in the unconstrained treatment, but we find no evidence of the winner\u27s curse when bidding constraints are imposed. Unconstrained bidders shade bids significantly more and their quantity-weighted prices are much lower than those in the constrained treatment. Interacting with the information structure, the capacity constraint has a significant impact on the auction results including the market clearing price, market efficiency, and the degree of market concentration. We provide evidence that efficient price discovery in multi-unit auctions with diverse information is possible, but careful attention to auction design will make this outcome more likely. Essay two examines how the introduction of a noncompetitive bidding option affects outcomes in a multi-unit uniform-price auction. The experimental design incorporates many of the characteristics of the markets that pertain to the issuance of new equity securities. Important features of the bidding environment include endogenous bidder entry, costly information acquisition, bidders that differ by capacity constraint, and substantial uncertainty with respect to the intrinsic value. We use a standard uniform-price auction as our baseline setting where only competitive bids are accepted. Our results show that introducing the noncompetitive bidding option improves auction performance by increasing revenue and reducing price error. Underpricing is found in both treatments, but is less severe in the presence of the noncompetitive bidding option. The incorporation of this option significantly increases both the small bidder participation rate and allocation, and reduces the incentive for small bidders to free ride by submitting extremely high bids. Under both treatments, information acquisition increases large bidders\u27 profits but proves unprofitable for small bidders, and pricing accuracy is increasing in the rate of information acquisition

Equilibrium Predictions in Wholesale Electricity Markets

We review supply function equilibrium models and their predictions on market outcomes in the wholesale electricity auctions. We discuss how observable market characteristics such as capacity constraints, number of power suppliers, load distribution and auction format affect the behavior of suppliers and performance of the market. We specifically focus on the possible market power exerted by pivotal suppliers and the comparison between discriminatory and uniform-price auctions. We also describe capacity investment behavior of electricity producers in the restructured industry.Electricity markets; Supply function equilibrium; Markov perfect equilibrium; electricity auctions; pivotal suppliers; capacity investment.

An Experimental Study of Complex-Offer Auctions from Wholesale Energy Markets

A Payment Cost Minimization auction has been proposed as an alternative to the Offer Cost Minimization auction for use in wholesale electric power markets with an intention to lower procurement cost of electricity. Efficiency concerns have been raised for this proposal while assuming that the true production costs would be revealed to the auctioneer in a competitive market. Using an experimental approach, the study compares the performance of these two complex-offer auctions, controlling for the level of unilateral market power. The analysis finds that neither auction results in allocations that correspond to the true cost revelation. Two auctions perform similarly in terms of procurement cost and efficiency. Surprisingly, consumer prices in a competitive environment approach the prices of an environment with market power. It appears that the expected institutional effects for procurement cost and efficiency are greatly dominated by the effects of anti-competitive behavior due to the offer complexity and a cyclical nature of market demand

An Experimental Study of Complex-Offer Auctions from Wholesale Energy Markets

A Payment Cost Minimization auction has been proposed as an alternative to the Offer Cost Minimization auction for use in wholesale electric power markets with an intention to lower procurement cost of electricity. Efficiency concerns have been raised for this proposal while assuming that the true production costs would be revealed to the auctioneer in a competitive market. Using an experimental approach, the study compares the performance of these two complex-offer auctions, controlling for the level of unilateral market power. The analysis finds that neither auction results in allocations that correspond to the true cost revelation. Two auctions perform similarly in terms of procurement cost and efficiency. Surprisingly, consumer prices in a competitive environment approach the prices of an environment with market power. It appears that the expected institutional effects for procurement cost and efficiency are greatly dominated by the effects of anti-competitive behavior due to the offer complexity and a cyclical nature of market demand

Using Laboratory Experiments to Design Efficient Market Institutions: The case of wholesale electricity markets

This paper assesses the contribution of laboratory experiments to the economics of design applied to the electricity industry. The analysis is dedicated to wholesale markets, and reviews the results accumulated to date concerning both the general architecture of power markets and the very details of the market rules or institution, that is the auction rule. We argue that these experimental results contribute to a better understanding of the performances properties and implementation features of competitive market designs and that experimental economics has proven very useful to public authorities to inform the restructuring of electricity industry. It thus confirms the role of experimental economics as a complement to theoretical approaches in the design effort.Experimental economics; market design; design economics; electricity auction;