Price Dispersion in Electricity Auctions: The Strategic Foundation and Implication to Market Design

44 Pages Posted: 19 Aug 2010 Last revised: 14 May 2014

See all articles by Shanshan Hu

Shanshan Hu

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies

Roman Kapuscinski

University of Michigan, Stephen M. Ross School of Business

William S. Lovejoy

University of Michigan, Stephen M. Ross School of Business

Date Written: October 24, 2011

Abstract

We model uniform and discriminatory auctions in wholesale electricity markets. High variability of electricity prices is often explained by exogenous economic factors. We, however, show that it can result endogenously from suppliers' strategic bidding, and that the connection between demand and price uncertainties is not direct, but manifested through bidders' assessments of capacity scarcity. Under symmetric and risk-neutral suppliers, the two auction formats yield the same expected procurement cost for buyers, but the discriminatory auction results in substantially lower price variance. When suppliers are risk-averse or have asymmetric capacities, expected procurement costs are also lower in discriminatory auctions.

Keywords: electricity price, procurement auction, discriminatory auction, uniform auction, price dispersion, capacity constraint, demand uncertainty, quantile regression

JEL Classification: C72, D24, D43, D44, L13

Suggested Citation

Hu, Shanshan and Kapuscinski, Roman and Lovejoy, William S., Price Dispersion in Electricity Auctions: The Strategic Foundation and Implication to Market Design (October 24, 2011). Available at SSRN: https://ssrn.com/abstract=1660609 or http://dx.doi.org/10.2139/ssrn.1660609

Shanshan Hu (Contact Author)

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies ( email )

Business 670
1309 E. Tenth Street
Bloomington, IN 47401
United States
812-856-2342 (Phone)

Roman Kapuscinski

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

William S. Lovejoy

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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