Understanding Strategic Bidding in Restructured Electricity Markets: A Case Study of ERCOT
AbstractWe 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.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11123.
Date of creation: Feb 2005
Date of revision:
Publication status: published as Hortacsu, Ali and Steven Puller. “Understanding Strategic Bidding in Multi-Unit Auctions: A Case Study of the Texas Electricity Spot Market.” RAND Journal of Economics 39 (Spring 2008): 86-114.
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Find related papers by JEL classification:
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
- L5 - Industrial Organization - - Regulation and Industrial Policy
- L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-02-20 (All new papers)
- NEP-COM-2005-02-20 (Industrial Competition)
- NEP-ENE-2005-02-20 (Energy Economics)
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