Electricity Market Design: The Good, the Bad, and the Ugly

This paper examines principles of market design as applied to electricity markets. I illustrate the principles with examples of both good and bad designs. I discuss one of the main design challenges—dealing with market power. I then discuss FERC’s choice of a standard market design.Auctions, Electricity Auctions, Market Design

An Ascending Multi-Item Auction with Financially Constrained Bidders

A number of heterogeneous items are to be sold to a group of potential bidders. Every bidder knows his own values over the items and his own budget privately. Due to budget constraint, bidders may not be able to pay up to their values. In such a market, a Walrasian equilibrium typically fails to exist and furthermore no existing allocation mechanism can tackle this case. We propose the notion of an `equilibrium under allotment' to such markets and develop an ascending auction mechanism that always finds such an equilibrium assignment and corresponding price system in finitely many rounds. The auction can be viewed as an appropriate and proper generalization of the ascending auction of Demange, Gale and Sotomayor from settings without financial constraints to settings with financial constraints. We examine various properties of the auction and its outcome.Ascending auction, Financial constraint, Equilibrium under allotment.

Bidding markets with financial constraints

We develop a model of bidding markets with financial constraints a la Che and Gale (1998b) in which two firms optimally choose their budgets. First, we provide an alternative explanation for the dispersion of markups and “money left on the table” across procurement auctions. Interestingly, this explanation does not hinge on significant private information but on differences, both endogenous and exogenous, in the availability of financial resources. Second, we explain why the empirical analysis of the size of markups may be biased downwards or upwards with a bias positively correlated with the availability of financial resources when the researcher assumes that the data are generated by the standard auction model. Third, we show that large concentration and persistent asymmetries in market shares together with occasional leadership reversals can arise as a consequence of the firms internal financial decisions even in the absence of exogenous shocks

How to Allocate R&D (and Other) Subsidies: An Experimentally Tested Policy Recommendation

This paper evaluates how R&D subsidies to the business sector are typically awarded. We identify two sources of ine_ciency: the selection based on a ranking of individual projects, rather than complete allocations, and the failure to induce competition among applicants in order to extract and use information about the necessary funding. In order to correct these ine_- ciencies we propose mechanisms that include some form of an auction in which applicants bid for subsidies. Our proposals are tested in a simulation and in controlled lab experiments. The results suggest that adopting our proposals may considerably improve the allocation

Putting auction theory to work : the simultaneous ascending auction

The"simultaneous ascending auction"was first introduced in 1994 to sell licenses to use bands of radio spectrum in the United States. Much of the attention devoted to the auction came from its role in reducing federal regulation of the radio spectrum and allowing market values, rather than administrative fiat, to determine who would use the spectrum resource. Several parts of economic theory proved helpful in designing the rules for simultaneous ascending auction and in thinking about how the design might be improved and adapted for new applications. After briefly reviewing the major rules of the auction in section 2, the author turns in section 3 to an analysis based on tatonnement theory, which regards the auction as a mechanism for discovering an efficient allocation and its supporting prices. The analysis reveals a fundamental difference between situations in which the licenses are mutual substitutes and others in which the same licenses are sometimes substitutes and sometimes complements. Section 4 is a selective account of some applications of game theory to evaluating the simultaneous ascending auction design for spectrum sales. Results like those reported in section 3 have led to renewed interest in auctions in which bids for license packages are permitted. In section 5, the author uses game theory to analyze the biases in a leading proposal for dynamic combinatorial bidding. Section 6 briefly answers two additional questions that economists often ask about auction design: If trading of licenses after the auction is allowed, why does the auction form matter at all for promoting efficient license assignments? Holding fixed the quantity of licenses to be sold, how sharp is the conflict between the objectives of assigning licenses efficiently and obtaining maximum revenue? Section 7 concludes.Economic Theory&Research,International Terrorism&Counterterrorism,Markets and Market Access,Environmental Economics&Policies,Labor Policies,Markets and Market Access,Access to Markets,Economic Theory&Research,Environmental Economics&Policies,International Terrorism&Counterterrorism

Simultaneous Ascending Bid Auctions with Budget Constraints

We identify and analyze three distinct effects arising from potentially binding budget constraints in multi-unit ascending auctions. First, binding budgets clearly reduce the level of competition among bidders. Second, budget constraints may at the same time make it difficult to sustain collusive equilibria when bidders lack sufficient resources to ‘punish’ defectors. Third, the mere possibility, even if arbitrarily small, of binding budget constraints can reduce competition substantially because bidders can ‘pretend’ to be constrained, even if they are not. In this cases, measures restricting the participation of low-budget bidders, e.g. reserve prices, can increase social welfare

Budget-Constrained Sequential Auctions with Incomplete Information

I study a budget-constrained, private-valuation, sealed-bid sequential auction with two incompletely-informed, risk-neutral bidders in which the valuations and income may be non-monotonic functions of a bidder\\'s type. Parameters permit the existence of multiple equilibrium symmetric bidding functions that differ in allocation, efficiency and revenue. The sequence of sale affects the competition for a good and therefore also affects revenue and the prices of each good in a systematic way that depends on the relationship among the valuations and incomes of bidders. The sequence of sale may affect prices and revenue even when the number of bidders is large relative to the number of goods. If a particular good, say α, is allocated to a strong bidder independent of the sequence of sale, then auction revenue and the price of good α is higher when good α is sold first.sequential auctions, budget constraints, efficiency, revenue, price, sequence.