Modeling Electricity Auctions

The recent debates over discriminatory versus uniform-price auctions in the UK and elsewhere have revealed an incomplete understanding of the limitations of some popular auction models when applied to real-world electricity markets. This has led certain regulatory authorities to prefer discriminatory auctions on the basis of reasoning from models which are not directly applicable to any existing electricity market. Vickrey auctions, although often recommended by economists, have also been ignored in these debates. This article describes the approach which we believe should be taken to analyzing these issues.electricity markets, auctions, Vickrey auctions

Modeling Electricity Auctions

The recent debates over discriminatory versus uniform-price auctions in the UK and elsewhere have revealed an incomplete understanding of the limitations of some popular auction models when applied to real-world electricity markets. This has led certain regulatory authorities to prefer discriminatory auctions on the basis of reasoning from models which are not directly applicable to any existing electricity market. Vickrey auctions, although often recommended by economists, have also been ignored in these debates. This article describes the approach which we believe should be taken to analyzing these issues

Mixed Strategies in Discriminatory Divisible-good Auctions

Author: Edward J. Anderson, Pär Holmberg and Andrew B. Philpott Keywords: Pay-as-bid Auction; Divisible Good Auction; Mixed Strategy Equilibria; Wholesale Electricity Markets Pages: 71 Published: November 24, 2009 JEL-codes: D43; D44; C72 Download Wp814.pdf (756 kB) Abstract Using the concept of market-distribution functions, we derive general optimality conditions for discriminatory divisible-good auctions, which are also applicable to Bertrand games and non-linear pricing. We introduce the concept of offer distribution function to analyze randomized offer curves, and characterize mixed-strategy Nash equilibria for pay-as-bid auctions where demand is uncertain and costs are common knowledge; a setting for which pure-strategy supply function equilibria typically do not exist. We generalize previous results on mixtures over horizontal offers as in Bertrand-Edgeworth games, but more importantly we characterize novel mixtures over partly increasing supply functions.Pay-as-bid Auction; Divisible Good Auction; Mixed Strategy Equilibria; Wholesale Electricity Markets

Auctions for Government Securities: A Laboratory Comparison of Uniform, Discriminatory and Spanish Designs

The Bank of Spain uses a unique auction format to sell government bonds, which can be seen as a hybrid of a uniform and a discriminatory auction. For winning bids above the average winning bid, buyers are charged the average winning bid, otherwise they pay their respective bids. We report on an experiment that compares this auction format to the discriminatory format, used in most other countries, and to the uniform format. Our design is based on a common value model with multi-unit supply and two-unit demand. The results show significantly higher revenue with the Spanish and the uniform formats than with the discriminatory one, while volatility of prices over time is significantly lower in the discriminatory format than in the Spanish and uniform cases. Actual price dispersion is significantly larger in the discriminatory than in the Spanish. Our data also exhibit the use of bid-spreading strategies in all three designs.Treasury, Spanish auctions, discriminatory auctions, uniform auctions, multi-unit demand, common values, experimental economics

Uniform vs. Discriminatory Auctions with Variable Supply - Experimental Evidence

In the variable supply auction considered here, the seller decides how many costumers with unit demand to serve after observing their bids. Bidders are uncertain about the seller's cost. We experimentally investigate whether a uniform or a discriminatory price auction is better for the seller in this setting. Exactly as predicted by theory, it turns out that the uniform price auction produces substantially higher bids, and consequently yields higher revenues and profits for the seller. Somewhat surprisingly but again predicted by theory, it also yields a higher number of transactions, which makes it the more efficient auction format.auctions, experiment, discriminatory, uniform

Auctioning Securities

Treasury debt and other divisible securities are traditionally sold in either a pay-your-bid (discriminatory) auction or a uniform-price auction. We compare these auction formats with a Vickrey auction and also with two ascending-bid auctions. The Vickrey auction and the alternative ascending-bid auction (Ausubel 1996) have important theoretical advantages for sellers. In a setting without private information, these auctions achieve the maximal revenue as a unique equilibrium in dominant strategies. In contrast, the pay- your-bid, uniform-price, and standard ascending-bid auction admit a multiplicity of equilibria that yield low revenues for the seller. We show how these results extend to a setting where bidders have affiliated private information. Our results question the standard ways that securities are offered to the public.Auctions; Multi-Unit Auctions, Security Auctions, Treasury Auctions

Declining valuations and equilibrium bidding in central bank refinancing operations

It is argued that bidders in liquidity-providing central bank operations should typically possess declining marginal valuations. Based on this hypothesis, we construct an equilibrium in central bank refinancing operations organised as variable rate tenders. In the case of the discriminatory pricing rule, bid shading does not disappear in large populations. The predictions of the model are shown to be consistent with the data for the euro area. JEL Classification: D44, E52discriminatory auction, Eurosystem, Open market operations, uniform price auction

Uniform vs. Discriminatory Auctions with Variable Supply - Experimental Evidence

In the variable supply auction considered here, the seller decides how many costumers with unit demand to serve after observing their bids. Bidders are uncertain about the seller's cost. We experimentally investigate whether a uniform or a discriminatory price auction is better for the seller in this setting. Exactly as predicted by theory, it turns out that the uniform price auction produces substantially higher bids, and consequently yields higher revenues and profits for the seller. Somewhat surprisingly but again predicted by theory, it also yields a higher number of transactions, which makes it the more efficient auction format.

Supply Function Equilibria with Capacity Constraints and Pivotal Suppliers

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 properly analyzed the impact of capacity constraints and pivotal firms on equilibrium predictions. We characterize the set of symmetric supply function equilibria for uniform price auctions when firms are capacity constrained and show that this set is increasing as capacity per firm rises. We provide conditions under which asymmetric equilibria exist and characterize these equilibria. In addition, we compare results for uniform price auctions to those for discriminatory auctions, and we compare our SFE predictions to equilibrium predictions of models in which bidders are constrained to bid on discrete units of output.supply function equilibrium, pivotal firm, wholesale electricity market

Bidding in an electricity pay-as-bid auction

One of the main elements of the current reform of electricty trading in the UK is the change from a uniform price auction in the wholesale market to discriminatory pricing. We analyse this change under two polar market structures (perfectly competitive and monopolistic supply), with demand uncertainty. We find that under perfect competition there is a trade-off between efficiency and average prices between the two auction rules. We also establish that a move from uniform to discriminatory pricing under monopoly conditions has a negative impact on profits and output (weakly), and ambiguous implications for prices and welfare.Multi-Unit Auctions; Price discrimination; Electricity