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

60 Pages Posted: 10 Mar 2005 Last revised: 10 Aug 2009

See all articles by Ali Hortacsu

Ali Hortacsu

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Steven L. Puller

Texas A&M University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2005

Abstract

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.

Suggested Citation

Hortacsu, Ali and Puller, Steven Lawrence, Understanding Strategic Bidding in Restructured Electricity Markets: A Case Study of Ercot (February 2005). NBER Working Paper No. w11123. Available at SSRN: https://ssrn.com/abstract=667164

Ali Hortacsu (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States
773-702-5841 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Steven Lawrence Puller

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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