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Use of Long-term Auctions for Network Investment

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  • Tanga McDaniel
  • Neuhoff, K.

Abstract

Short-term auctions for access to entry terminals of the British gas-network appear to successfully allocate scarce resources and capture scarcity rent. Now long-term auctions are being introduced to guide future capacity expansion decisions. In our model the fraction of rights issued in the long-term auction turns out to be a crucial design parameter. Even a `hypothetically` optimal parameter choice can in general only satisfy one of three aims: Unbiased provision of capacity, full revelation of private information and minimisation of distortions from network effects. The results suggest that long-term auctions for transmission capacity are not necessarily preferable to regulatory approved capacity expansion.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0213.

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Length: 32
Date of creation: May 2002
Date of revision:
Handle: RePEc:cam:camdae:0213

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Keywords: Auctions; Gas; Investment; Networks; Regulation;

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References

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  1. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, vol. 85(2), pages 258-293, April.
  2. Tanga McDaniel & Neuhoff, K., 2002. "Auctions to gas transmission access: The British experience," Cambridge Working Papers in Economics 0234, Faculty of Economics, University of Cambridge.
  3. P. Dasgupta & Eric Maskin, 1998. "Efficient Auctions," Harvard Institute of Economic Research Working Papers 1857, Harvard - Institute of Economic Research.
  4. Joskow, P. & Edward Kahn, 2002. "A Quantitative Analysis of Pricing Behavior In California’s Wholesale Electricity Market During Summer 2000," Cambridge Working Papers in Economics 0211, Faculty of Economics, University of Cambridge.
  5. Jehiel, Philippe & Moldovanu, Benny, 2001. "Efficient Design with Interdependent Valuations," Econometrica, Econometric Society, vol. 69(5), pages 1237-59, September.
  6. Phillips, Gordon M & Weiner, Robert J, 1994. "Information and Normal Backwardation as Determinants of Trading Performance: Evidence from the North Sea Oil Forward Market," Economic Journal, Royal Economic Society, vol. 104(422), pages 76-95, January.
  7. Jeremy Bulow & Paul Klemperer, 1999. "Prices and the Winner's Curse," Game Theory and Information 9904003, EconWPA.
  8. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, January.
  9. repec:wop:humbsf:2000-72 is not listed on IDEAS
  10. Bushnell, James B & Stoft, Steven E, 1996. "Electric Grid Investment under a Contract Network Regime," Journal of Regulatory Economics, Springer, vol. 10(1), pages 61-79, July.
  11. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  12. Thomas-Olivier Leautier, 2000. "Regulation of an Electric Power Transmission Company," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 61-92.
  13. Charles R. Plott, 1997. "Laboratory Experimental Testbeds: Application to the PCS Auction," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(3), pages 605-638, 09.
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Cited by:
  1. Tanga McDaniel & Andreas Nicklisch, 2004. "Prices as indicators of scarcity - an experimental study of a multistage auction," Papers on Strategic Interaction 2004-30, Max Planck Institute of Economics, Strategic Interaction Group.

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