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The Auction of Contracts by Consumer Groups and the Effect on Market Power

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  • Pablo Serra

    (Universidad de Chile)

Abstract

This article discusses the auctioning of financial contracts by aggregations of consumers who aim to reduce the spot price of a concentrated industry’s product; this is a frequent arrangement in electricity markets. The contracts' underlying asset is the product; the auctions' bidding variable is the strike price; and the bidders are the producers. Using a three-stage complete-information game, we show that when all consumers belong to some group, in the subgame perfect Nash equilibrium, each group fully hedges its consumption, and total output reaches its efficient level. Otherwise, each group over-hedges its consumption, and total production is below the efficiency level.

Suggested Citation

  • Pablo Serra, 2024. "The Auction of Contracts by Consumer Groups and the Effect on Market Power," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(3), pages 341-359, May.
    • Handle: RePEc:kap:revind:v:64:y:2024:i:3:d:10.1007_s11151-024-09943-3
    DOI: 10.1007/s11151-024-09943-3
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    More about this item

    Keywords

    Contracts; Auctions; Consumer groups; Electricity markets;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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