This paper derives a Supply Function Equilibrium (SFE) of a pay-as-bid auction, also called discriminatory auction. Such an auction is used in the balancing market for electric power in Britain. For some probability distributions of demand a pure-strategy equilibrium does not exist. If demand follows an inverse polynomial probability distribution, SFE always exists. Assuming this probability distribution, the pay-as-bid procurement auction is compared to a SFE of a uniform-price procurement auction, the auction form of most electric power markets. The demand-weighted average price is found to be equal or lower in the pay-as-bid procurement auction.
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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number
2005:17.
Length: 25 pages Date of creation: 16 May 2005 Date of revision: Handle: RePEc:hhs:uunewp:2005_017
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