Market Design: Auctions and Matching

Auctions, market design

Comments on the RGGI Market Design

Auctions, carbon auctions, greenhouse gas auctions

The Convergence of Market Designs for Adequate Generating Capacity

This paper compares market designs intended to solve the resource adequacy (RA) problem, and finds that, in spite of rivalrous claims, the most advanced designs have nearly converged. The original dichotomy between approaches based on long-term energy contracts and those based on short-term capacity markets spawned two design tracks. Long-term contracts led to call-option obligations which provide market-power control and the ability to strengthen performance incentives, but this approach fails to replace the missing money at the root of the adequacy problem. Hogan’s energy-only market fills this gap. On the other track, the short-term capacity markets (ICAP) spawned long-term capacity market designs. In 2004, ISO New England proposed a short-term market with hedged performance incentives essentially based on high spot prices. In 2005 we developed for New England a forward capacity market with load obligated to purchase a target level of capacity covered by an energy call option. The two tracks have now converged on two conclusions: (1) High real-time energy prices should provide performance incentives. (2) High energy prices should be hedged with call options. We argue that two more conclusions are needed: (3) Capacity targets rather than high and volatile spot prices should guide investment, and (4) long-term physically based options should be purchased in a forward market for capacity. The result will be that adequacy is maintained, performance incentives are restored, market power and risks are reduced from present levels, and prices are hedged down to a level below the present price cap.Auctions, electricity auctions, uniform-price auctions

Market design

Europe is liberalising electricity in accordance with the European Commission’s Electricity Directives. Different countries have responded differently, notably in the extent of restructuring, treatment of mergers, market power, and vertical unbundling. While Britain and Norway have achieved effective competition, others like Germany, Spain and France are still struggling to deal with dominant and sometimes vertically integrated companies. The Netherlands offers an interesting intermediate case, where good economic analysis has sometimes been thwarted by legalistic interpretations. Investment under the new Emissions Trading system could further transform the electricity industry but may be hampered by slow progress in liberalising European gas markets

Dynamic Matching Market Design

We introduce a simple benchmark model of dynamic matching in networked markets, where agents arrive and depart stochastically and the network of acceptable transactions among agents forms a random graph. We analyze our model from three perspectives: waiting, optimization, and information. The main insight of our analysis is that waiting to thicken the market can be substantially more important than increasing the speed of transactions, and this is quite robust to the presence of waiting costs. From an optimization perspective, naive local algorithms, that choose the right time to match agents but do not exploit global network structure, can perform very close to optimal algorithms. From an information perspective, algorithms that employ even partial information on agents' departure times perform substantially better than those that lack such information. To elicit agents' departure times, we design an incentive-compatible continuous-time dynamic mechanism without transfers

Optimal Market Design

This paper introduces three methodological advances to study the optimal design of static and dynamic markets. First, we apply a mechanism design approach to characterize all incentive-compatible market equilibria. Second, we conduct a normative analysis, i.e. we evaluate alternative competition and innovation policies from a welfare perspective. Third, we introduce a reliable way to measure competition in dynamic markets with nonlinear pricing. We illustrate the usefulness of our approach in several ways. We reproduce the empirical finding that innovation levels are higher in markets with lower price-cost margins, yet such markets are not necessarily more competitive. Indeed, we prove the Schumpeterian conjecture that more dynamic markets characterized by higher levels of innovation should be less competitive. Furthermore, we demonstrate how our approach can be used to determine the optimal combination of market regulation and innovation policies such as R&D subsidies or a weakening of the patent system. Finally, we show that optimal markets are characterized by strictly positive price-cost margins.competition policy;dynamic markets;competition measures;Schumpeter;mechanism design

Downtown Providence Farmers Market Design

This market essentially combines a marketplace with an existing or new industrial building. The hybrid created results in space that has daily retail sales and hours, as well as other goods available at other times. The industrial aspect typically acts as the anchor, as the market’s activities help attract a different group of consumers at other business times. An example of this would be a seafood supply warehouse that also provides dining and entertainment as a nightlife destination

"Large Market Design in Dominance"

This paper introduces a new concept of market mechanism design into general economic environments with finite but many traders, where multiple objects are traded and any combination of complements and substitutes is permitted. The auctioneer randomly divides traders into multiple groups. Within each group, trades occur at the market-clearing price vector of another group. With private values, any undominated strategy profile mimics price-taking behavior, enforcing perfect competition. With interdependent values, any twice iteratively undominated strategy profile mimics the rational expectations equilibrium, enforcing ex post efficiency. Our mechanisms are detail-free, i.e., they do not depend on the details of model specification.

Market Design with Correlated Valuations

The effects of information on market design are explored in a simple setting where firms have private information about their correlated fixed costs and the government aims to maximize its expected revenue conditional on achieving efficient allocations. Government revenues are higher when the costs are less correlated (or are more of a private value). The reduced correlation increases the firms' information rents, but a change in the information structure also changes the expected market structures with positive effects on government revenues. If the government faces the no-deficit constraint, there are situations where efficient allocations are achieved under asymmetric information but not under symmetric information.market structure, correlated values, market design, government revenue