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Comparing Supply Function Equilibria of Pay-as-Bid and Uniform-Price Auctions

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  • Holmberg, Pär

    ()
    (Department of Economics)

Abstract

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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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2005:17.

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Length: 25 pages
Date of creation: 16 May 2005
Date of revision:
Handle: RePEc:hhs:uunewp:2005_017

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Supply function equilibrium; pay-as-bid auction; uniform-price auction; discriminatory auction; oligopoly; capacity constraint; wholesale electricity market;

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References

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  1. Holmberg, Pär, 2005. "Numerical Calculation of an Asymmetric Supply Function Equilibrium with Capacity Constraints," Working Paper Series 2005:12, Uppsala University, Department of Economics.
  2. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-94, March.
  3. Kahn, Alfred E. & Cramton, Peter C. & Porter, Robert H. & Tabors, Richard D., 2001. "Uniform Pricing or Pay-as-Bid Pricing: A Dilemma for California and Beyond," The Electricity Journal, Elsevier, vol. 14(6), pages 70-79, July.
  4. Holmberg, Pär, 2004. "Unique Supply Function Equilibrium with Capacity Constraints," Working Paper Series 2004:20, Uppsala University, Department of Economics.
  5. Rassenti, Stephen J & Smith, Vernon L & Wilson, Bart J, 2003. "Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels," Journal of Regulatory Economics, Springer, vol. 23(2), pages 109-23, March.
  6. Natalia Fabra, 2003. "Tacit Collusion in Repeated Auctions: Uniform Versus Discriminatory," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 271-293, 09.
  7. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter.
  8. Bolle, Friedel, 1992. "Supply function equilibria and the danger of tacit collusion : The case of spot markets for electricity," Energy Economics, Elsevier, vol. 14(2), pages 94-102, April.
  9. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October.
  10. Federico, Giulio & Rahman, David, 2003. "Bidding in an Electricity Pay-as-Bid Auction," Journal of Regulatory Economics, Springer, vol. 24(2), pages 175-211, September.
  11. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  12. Holmberg, Pär, 2005. "Asymmetric Supply Function Equilibrium with Constant Marginal Costs," Working Paper Series 2005:16, Uppsala University, Department of Economics.
  13. Aleksandr Rudkevich & Max Duckworth & Richard Rosen, 1998. "Modeling Electricity Pricing in a Deregulated Generation Industry: The Potential for Oligopoly Pricing in a Poolco," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 19-48.
  14. Hästö, Peter & Holmberg, Pär, 2005. "Some Inequalities related to the analysis of electricity auctions," Working Paper Series 2005:23, Uppsala University, Department of Economics.
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Cited by:
  1. Hästö, Peter & Holmberg, Pär, 2005. "Some Inequalities related to the analysis of electricity auctions," Working Paper Series 2005:23, Uppsala University, Department of Economics.
  2. Vítor Marques & Isabel Soares & Adelino Fortunato, 2008. "Uniform Price Market and Behaviour Pattern: What Does the Iberian Electricity Market Point Out?," GEMF Working Papers 2008-08, GEMF - Faculdade de Economia, Universidade de Coimbra.
  3. Johansson, Fredrik & Klevmarken, Anders, 2006. "Explaining the size and nature of response in a survey on health status and economic standard," Working Paper Series 2006:2, Uppsala University, Department of Economics.
  4. Pär Holmberg, 2009. "Supply function equilibria of pay-as-bid auctions," Journal of Regulatory Economics, Springer, vol. 36(2), pages 154-177, October.
  5. Berg, Lennart & Berger, Tommy, 2005. "The Q theory and the Swedish housing market –an empirical test," Working Paper Series 2005:19, Uppsala University, Department of Economics.

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