An Experimental Study of Complex-Offer Auctions from Wholesale Energy Markets

Applied Economics and Finance, Vol. 1, No. 1, p. 96-115, May 2014

20 Pages Posted: 11 Apr 2017

See all articles by Rimvydas Baltaduonis

Rimvydas Baltaduonis

Gettysburg College - Department of Economics

Date Written: April 10, 2014

Abstract

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.

Keywords: Avoidable Fixed Cost, Complex-Offer Auction, Cyclical Demand, Efficiency, Electricity, Two-Part Pricing

JEL Classification: C72, D4, D61, L94

Suggested Citation

Baltaduonis, Rimvydas, An Experimental Study of Complex-Offer Auctions from Wholesale Energy Markets (April 10, 2014). Applied Economics and Finance, Vol. 1, No. 1, p. 96-115, May 2014, Available at SSRN: https://ssrn.com/abstract=2948998

Rimvydas Baltaduonis (Contact Author)

Gettysburg College - Department of Economics ( email )

300 N Washington St
Campus Box 391
Gettysburg, PA 17325
United States

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