Understanding Strategic Bidding in Restructured Electricity Markets: A Case Study of ERCOT

We examine the bidding behavior of firms competing on ERCOT, the hourly electricity balancing market in Texas. We characterize an equilibrium model of bidding into this uniform-price divisible-good auction market. Using detailed firm-level data on bids and marginal costs of generation, we find that firms with large stakes in the market performed close to theoretical benchmarks of static, profit-maximizing bidding derived from our model. However, several smaller firms utilized excessively steep bid schedules that deviated significantly from our theoretical benchmarks, in a manner that could not be empirically accounted for by the presence of technological adjustment costs, transmission constraints, or collusive behavior. Our results suggest that payoff scale matters in firms' willingness and ability to participate in complex, strategic market environments. Finally, although smaller firms moved closer to theoretical bidding benchmarks over time, their bidding patterns contributed to productive inefficiency in this newly restructured market, along with efficiency losses due to the close-to optimal exercise of market power by larger firms.

Testing Theories of Scarcity Pricing in the Airline Industry

This paper investigates why passengers pay substantially different fares for travel on the same airline between the same two airports. We investigate questions that are fundamentally different from those in the existing literature on airline price dispersion. We use a unique new dataset to test between two broad classes of theories regarding airline pricing. The first group of theories, as advanced by Dana (1999b) and Gale and Holmes (1993), postulates that airlines practice scarcity based pricing and predicts that variation in ticket prices is driven by differences between high demand and low demand periods. The second group of theories is that airlines practice price discrimination by using ticketing restrictions to segment customers by willingness to pay. We use a unique dataset, a census of ticket transactions from one of the major computer reservation systems, to study the relationships between fares, ticket characteristics, and flight load factors. The central advantage of our dataset is that it contains variables not previously available that permit a test of these theories. We find only mixed support for the scarcity pricing theories. Flights during high demand periods have slightly higher fares but exhibit no more fare dispersion than flights where demand is low. Moreover, the fraction of discounted advance purchase seats is only slightly higher on off-peak flights. However, ticket characteristics that are associated with second-degree price discrimination drive much of the variation in ticket pricing.

Effects of Mandatory Energy Efficiency Disclosure in Housing Markets

HealthCarePolicymakers are increasingly using mandated information disclosures as a way to increase market efficiency by providing information on quality to buyers. In the housing market in Austin, Texas, home sellers are required to perform a standardized energy audit and provide home efficiency information to prospective buyers. In working paper 1916, Steven Puller, PERC’s Professor of Free Enterprise, along with coauthors Erica Myers and Jeremy West investigate whether the audit and disclosure policies mandated by the City of Austin have the intended effect of improving the energy efficiency quality of homes. To read a summary of this working paper in the Winter 2020 issue of PERCspectives on Research, click on View or Download below

Vehicle Miles (Not) Traveled: Fuel Economy Requirements, Vehicle Characteristics, and Household Driving

MacroeconomicsSimply put, the less Americans drive, the less gas they use. More driving, more gas. The negative effects of gasoline consumption are well-documented, ranging from local effects of automobile pollution on individuals' health to the global impact of vehicle emissions on climate change. So what makes households drive less? In Working Paper 1607, PERC's Rex Grey Professor Mark Hoekstra, PERC's Professor of Free Enterprise Steven L. Puller, UC Santa Cruz's Jeremy West, and Texas A&M University's Jonathan Meer, examine the effects of drivers' behaviors on gasoline consumption

Cash for Corollas: When Stimulus Reduces Spending

MacroeconomicsThe 2009 Cash for Clunkers program aimed to stimulate consumer spending in the new automobile industry, which was experiencing disproportionate reductions in demand and employment during the Great Recession. Exploiting program eligibility criteria in a regression discontinuity design, we show nearly 60 percent of the subsidies went to households who would have purchased during the two-month program anyway; the rest accelerated sales by no more than eight months. Moreover, the program’s fuel efficiency restrictions shifted purchases toward vehicles that cost on average $5,000 less. On net, Cash for Clunkers significantly reduced total new vehicle spending over the ten month perio

Power to Choose? An Analysis of Consumer Inertia in the Residential Electricity Market

PublicFinanceMany jurisdictions around the world have deregulated utilities and opened retail markets to competition. However, inertial decisionmaking can diminish consumer benefits of retail competition. Using household-level data from the Texas residential electricity market, the authors document evidence of consumer inertia. They estimate an econometric model of retail choice to measure two sources of inertia: (1) search frictions/inattention, and (2) a brand advantage that consumers afford the incumbent. Findings show that households rarely search for alternative retailers, and when they do search, households attach a brand advantage to the incumbent. Counterfactual experiments show that low-cost information interventions can notably increase consumer surplus

The Vicious Circle of Blackouts and Revenue Collection in Developing Economies: Evidence from Ghana

MacroeconomicsAs reliable electricity is needed to form and sustain successful businesses, power is critically important for economic growth, especially for developing countries in Sub-Saharan Africa. In urban areas where most residences and businesses are connected to the power grid, utilities that are hampered by revenue shortfalls must implement load shedding, or rolling blackouts, to meet rising demand. In working paper 1809, PERC Professor Steven Puller, PERC Graduate Fellow Brittany Street and co-authors Belinda Yebuah-Dwamena and James Dzansi investigate whether revenue shortfalls from low bill collection rates contribute to a negative feedback loop that results in power supply shortages and a weaker electric utility

Vehicle Miles (Not) Traveled: Fuel Economy Requirements, Vehicle Characteristics, and Household Driving

Retirement_SavingsSimply put, the less Americans drive, the less gas they use. More driving, more gas. The negative effects of gasoline consumption are well-documented, ranging from local effects of automobile pollution on individuals' health to the global impact of vehicle emissions on climate change. So what makes households drive less? In Working Paper 1607, PERC's Rex Grey Professor Mark Hoekstra, PERC's Professor of Free Enterprise Steven L. Puller, UC Santa Cruz's Jeremy West, and Texas A&M University's Jonathan Meer, examine the effects of drivers' behaviors on gasoline consumption

The Vicious Circle of Blackouts and Revenue Collection in Developing Economies: Evidence from Ghana

Retirement_SavingsAccess to reliable electricity is one of the largest barriers to economic growth in developing economies. Utilities suffer from the twin challenges of quasi-fiscal deficits and the need to implement rolling blackouts during periods with supply shortages. In this paper, the authors measure a negative feedback loop between bill payment and rolling blackouts that can create a “revenue trap� for electric utilities. Using household-level data on bill payment and power outages before and after a power crisis in Ghana, the authors estimate the impact of quasi-random exposure to power outages on subsequent bill payment. This paper studies a unique feature of the power grid whereby customers in close proximity are exposed to different levels of blackouts because some are served by a feeder with critical infrastructure “down the line� and others are served by feeders that do not service essential infrastructure. Findings show that households quasi-experimentally exposed to rolling blackouts accumulate larger unpaid balances relative to households on essential feeders. This is consistent with a negative feedback loop in which decreases in power reliability induce households to pay bills at lower rates and, thus, weaken the utility’s financial viability