Bidding in an Electricity Pay-as-Bid Auction

Nuffield College Economics Paper No. 2001-W5

39 Pages Posted: 8 Jun 2001

See all articles by Giulio Federico

Giulio Federico

Chief Economist Team, DG Competition, European Commission

David M. Rahman

University of California, Los Angeles (UCLA) - Department of Economics

Date Written: April 2001

Abstract

One of the main elements of the current reform of electricity trading in the UK is the change from a uniform price auction in the wholesale market to discriminatory pricing. We analyse this change under two polar market structures (perfectly competitive and monopolistic supply), with demand uncertainty.

We find that under perfect competition there is a direct trade-off between efficiency and average prices between the two auction rules.

We establish that a move from uniform to discriminatory pricing under monopoly conditions has a negative impact on profits and output (weakly), and ambiguous implications for prices and welfare. In particular, prices will increase and welfare fall if demand uncertainty is relatively high and costs relatively steep. We also show that monopoly pricing under pay-as-bid and demand uncertainty is similar to non-linear pricing, and it can be thought of as "fourth-degree price discrimination".

We conclude by discussing the issues of strategic interaction and entry under the two acution rules, arguing in particular that there is a close correspondence between Bertrand vs. Cournot outcomes and pay-as-bid vs. uniform pricing under some circumstances.

Keywords: Multi-unit auctions, Price discrimination, Electricity

JEL Classification: D41, D42, D44, L94

Suggested Citation

Federico, Giulio and Rahman, David M., Bidding in an Electricity Pay-as-Bid Auction (April 2001). Nuffield College Economics Paper No. 2001-W5, Available at SSRN: https://ssrn.com/abstract=271700 or http://dx.doi.org/10.2139/ssrn.271700

Giulio Federico (Contact Author)

Chief Economist Team, DG Competition, European Commission ( email )

David M. Rahman

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

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