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.

Analysis of multi-attribute multi-unit procurement auctions and capacity-constrained sequential auctions

This dissertation examines an iterative multi-attribute auction for multi-unit procurement in the first part. A multi-unit allocation problem that allows order split among suppliers is formulated to improve the market efficiency. Suppliers are allowed to provide discriminative prices over units based on their marginal costs. A mechanism called Iterative Multiple-attribute Multiple-unit Reverse Auction (IMMRA) is proposed based on the assumption of the modified myopic best-response strategies. Numerical experiment results show that the IMMRA achieves market efficiency in most instances. The inefficiency occurs occasionally on the special cases when cost structures are significantly different among suppliers. Numerical results also show that the IMMRA results in lower buyer payments than the Vickrey-Clarke-Grove (VCG) payments in most cases. In the second part, two sequential auctions with the Vickrey-Clarke-Grove (VCG) mechanism are proposed for two buyers to purchase multiple units of an identical item. The invited suppliers are assumed to have capacity constraints of providing the required demands. Three research problems are raised for the analysis of the sequential auctions: the suppliers\u27 expected payoff functions, the suppliers\u27 bidding strategies in the first auction, and the buyers\u27 procurement costs. Because of the intrinsic complexity of the problems, we limit our study to a duopoly market environment with two suppliers. Both suppliers’ dominant bidding strategies are theoretically derived. With numerical experiments, suppliers’ expected profits and buyers’ expected procurement costs are empirically analyzed

Analysis of multi-attribute multi-unit procurement auctions and capacity-constrained sequential auctions

This dissertation examines an iterative multi-attribute auction for multi-unit procurement in the first part. A multi-unit allocation problem that allows order split among suppliers is formulated to improve the market efficiency. Suppliers are allowed to provide discriminative prices over units based on their marginal costs. A mechanism called Iterative Multiple-attribute Multiple-unit Reverse Auction (IMMRA) is proposed based on the assumption of the modified myopic best-response strategies. Numerical experiment results show that the IMMRA achieves market efficiency in most instances. The inefficiency occurs occasionally on the special cases when cost structures are significantly different among suppliers. Numerical results also show that the IMMRA results in lower buyer payments than the Vickrey-Clarke-Grove (VCG) payments in most cases. In the second part, two sequential auctions with the Vickrey-Clarke-Grove (VCG) mechanism are proposed for two buyers to purchase multiple units of an identical item. The invited suppliers are assumed to have capacity constraints of providing the required demands. Three research problems are raised for the analysis of the sequential auctions: the suppliers\u27 expected payoff functions, the suppliers\u27 bidding strategies in the first auction, and the buyers\u27 procurement costs. Because of the intrinsic complexity of the problems, we limit our study to a duopoly market environment with two suppliers. Both suppliers’ dominant bidding strategies are theoretically derived. With numerical experiments, suppliers’ expected profits and buyers’ expected procurement costs are empirically analyzed

Assessing Social Costs of Inefficient Procurement Design

This paper considers the social costs implied by inefficient allocation of contracts in a first price, sealed bid procurement auction with asymmetric bidders. We adopt a constrained (piecewise linear) strategy equilibrium concept and estimate the structural parameters of the bidders’ distribution of costs. We estimate social costs defined as the predicted cost difference between the winning firm and the most efficient bidding firm. We also compare the expected procurement costs under two different auction formats. The data is collected from procurement auctions of road painting in Sweden during 1993-99. The results indicate that the social costs of inefficient contract allocation is about 1.7 per cent of total potential social cost and that an efficient second price auction would lower the expected procurement cost by 2.8 per cent.Procurement auctions; inefficiency; constrained strategy equilibrium; simulation

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

Exact algorithms for procurement problems under a total quantity discount structure.

In this paper, we study the procurement problem faced by a buyer who needs to purchase a variety of goods from suppliers applying a so-called total quantity discount policy. This policy implies that every supplier announces a number of volume intervals and that the volume interval in which the total amount ordered lies determines the discount. Moreover, the discounted prices apply to all goods bought from the supplier, not only to those goods exceeding the volume threshold. We refer to this cost-minimization problem as the TQD problem. We give a mathematical formulation for this problem and argue that not only it is NP-hard, but also that there exists no polynomial-time approximation algorithm with a constant ratio (unless P = NP). Apart from the basic form of the TQD problem, we describe three variants. In a first variant, the market share that one or more suppliers can obtain is constrained. Another variant allows the buyer to procure more goods than strictly needed, in order to reach a lower total cost. In a third variant, the number of winning suppliers is limited. We show that the TQD problem and its variants can be solved by solving a series of min-cost flow problems. Finally, we investigate the performance of three exact algorithms (min-cost flow based branch-and-bound, linear programming based branch-and-bound, and branch-and-cut) on randomly generated instances involving 50 suppliers and 100 goods. It turns out that even the large instances of the basic problem are solved to optimality within a limited amount of time. However, we find that different algorithms perform best in terms of computation time for different variants.Algorithms; Approximation; Branch-and-bound; Complexity; Cost; Exact algorithm; Intervals; Linear programming; Market; Min-cost flow; Order; Performance; Policy; Prices; Problems; Procurement; Reverse auction; Structure; Studies; Suppliers; Time; Volume discounts;

Sequential auction and auction design

Often an auction designer has the option of selling, or purchasing, those lots available in one auction or a sequence of auctions. In addition, bidder opportunities will not be static, in part due to arrival of information, but also because bidders can face deadlines for making decisions. This paper examines the optimal decision about how to divide what is available over time.sequential auctions

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