Investment Incentives and Electricity Spot Market Design

In liberalized electricity markets strategic firms compete in an environment characterized by fluctuating demand and non-storability of electricity. While spot market design under those conditions by now is well understood, a rigorous analysis of investment incentives is still missing. Existing models, as the peak-load-pricing approach, analyze welfare optimal investment and find that optimal investment is higher with more competitive spot markets. In this article we want to extend the analysis to investment decisions of strategic firms that anticipate competition on many consecutive spot markets with fluctuating (and possibly uncertain) demand. We study how the degree of spot market competition affects investment incentives and welfare and provide an application of the model to electricity market data. Our results show that more competitive spot market prices strictly decrease investment incentives of strategic firms. The reduction of investment incentives can be so intense to even offset the beneficial impact of more competitive spot market design. Those results obtain with and without free entry. Our analysis thus demonstrates that investment incentives necessarily have to be taken into account for a meaningful assessment of proper electricity spot market design

Strategic capacity choice under uncertainty: the impact of market structure on investment and welfare

We analyze a market game where firms choose capacities under uncertainty about future market conditions and make output choices after uncertainty has unraveled. We show existence and uniqueness of equilibrium under imperfect competition and establish that capacity choices by strategic firms are generally too low from a welfare point of view. We also demonstrate that strategic firms choose even lower capacities if they anticipate competitive spot market pricing (e.g. due to regulatory intervention). We finally illustrate how the model can be used to assess the impact of electricity market liberalization on total capacity and welfare by fitting it to the data of the German electricity market. --Investment incentives,demand uncertainty,cost uncertainty,Cournot competition,First Best,Second Best,capacity obligations,spot market regulation

Bidding Behavior in Multi-Unit Auctions - An Experimental Investigation

We present laboratory experiments of five different multi-unit auction mechanisms. Two units of a homogeneous object were auctioned off among two bidders with flat demand for two units. We test whether expected demand reduction occurs in open and sealed-bid uniform-price auctions. Revenue equivalence is tested for these auctions as well as for the Ausubel, the Vickrey and the discriminatory sealed-bid auction. Furthermore, we compare the five mechanisms with respect to the efficient allocation of the units.Multi-Unit Auctions, Demand Reduction, Experimental Economics

EQUILIBRIUM INVESTMENT IS REDUCED IF WE ALLOW FOR FORWARD CONTRACTS

In this paper we analyze incentives to invest in capacity prior to asequence of Cournot spot markets with varying demand. We compareequilibrium investment in the absence and in presence of the possibility to tradeon forward markets. We find that the possibility to trade forwards reducesequilibrium investments.Investment incentives, demand fluctuations, forward markets

An Experiment on Learning in a Multiple Games Environment

We study experimentally how players learn to make decisions if they face many different (normal-form) games. Games are generated randomly from a uniform distribution in each of 100 rounds. We find that agents do extrapolate between games but learn to play strategically equivalent games in the same way. If either there are few games or if explicit information about the opponent''s behavior is provided (or both) convergence to the unique Nash equilibrium generally occurs. Otherwise this is not the case and play converges to a distribution of actions which is Non-Nash. Action choices, though, that cannot be explained by theoretical models of either belief-bundling or action bundling are never observed. Estimating different learning models we find that Nash choices are best explained by finer categorizations than Non-Nash choices. Furthermore participants scoring better in the "Cognitive Reflection Test" choose Nash actions more often than other participants.microeconomics ;

Mechanisms for efficient voting with private information about preferences

We experimentally study behavior in a simple voting game where players have private information about their preferences. With random matching, subjects overwhelmingly follow the dominant strategy to exaggerate their preferences, which leads to inefficiency. We analyze an exogenous linking mechanism suggested by Jackson and Sonnenschein (2007) as well as repeated interaction in different settings, which could allow endogenous linking mechanisms to evolve. We find that applying the exogenous mechanism captures nearly all achievable efficiency gains, whereas repeated interaction leads to significant gains in truthful representation and efficiency only in a setting where players can choose their partners. --Experimental Economics,Mechanism Design,Implementation,Linking,Bayesian Equilibrium,Efficiency

COOPERATION IN VISCOUS POPULATIONS - EXPERIMENTAL EVIDENCE

We experimentally investigate the effect of population viscosity (an increased probability to interact with others of one's type or group) on cooperation in a standard prisoner's dilemma environment. Subjects can repeatedly choose between two groups that differ in the defector gain in the associated prisoner's dilemma. Choosing into the group with the smaller defector-gain can signal one's willingness to cooperate. The degree of viscosity is varied across treatments. We find that viscosity produces an endogenous sorting of cooperators and defectors and persistently high rates ofcooperation. Higher viscosity leads to a sharp increase in overall cooperation rates and in addition positively affects the subjects' intrinsic willingness to cooperate.Experiments, Cooperation, Group Selection, Norms, Population

Let me sleep on it: Delay reduces rejection rates in Ultimatum Games

We show that delaying acceptance decisions in the Ultimatum Game drastically increases acceptance rates of low offers. While in standard treatments without delay less than 20% of low offers are accepted, these numbers increase to around 65-75% as we delay the acceptance decisions by around 10 minutes. Our findings provide precise evidence for familiar notions such as ''sleeping on it'' and show that there may be a good reason why public administrations often communicate bad news on Friday afternoons. They shed new light on recent evidence in Neuroscience on brain activation after receiving bad news and raise questions about the extent to which decisions reveal the preferences of a decision-maker.microeconomics ;

Access to Commitment Devices Reduces Investment Incentives in Oligopoly

In this paper we analyze incentives to invest in capacity prior to a sequence of Cournot spot markets with varying demand. We compare equilibrium investment in the absence and in presence of the possibility to trade on forward markets. We find that the access to strategic devices (such as forward contracts as analyzed by Allaz and Vila (1993), or, equivalently strategic delegation as analyzed by Fershtman and Judd (1987) or Vickers (1985)) prior to spot market competition reduces equilibrium investments.Investment incentives, commitment devices, oligopoly, demand fluctuations, forward markets

BIDDING BEHAVIOR IN MULTI-UNIT AUCTIONS - AN EXPERIMENTAL INVESTIGATION AND SOME THEORETICAL INSIGHTS

We present laboratory experiments of five different multi-unit auction mechanisms. Two units of a homogeneous object were auctioned off among two bidders with flat demand for two units. We test whether expected demand reduction occurs in open and sealed-bid uniform-price auctions. Revenue equivalence is tested for these auctions as well as for the Ausubel, the Vickrey and the discriminatory sealed-bid auction. Furthermore, we compare the five mechanisms with respect to the efficient allocation of the units. We also provide some theoretical insights concerning the equilibria of uniform-price auctions with incomplete information.Multi–Unit Auctions, Demand Reduction, Experimental Economics.