Identification and Estimation of Cost Functions Using Observed Bid Data: An Application to Electricity Markets
AbstractThis paper presents several techniques for recovering cost function estimates for electricity generation from a model of optimal bidding behavior in a competitive electricity market. Two techniques are developed based on different models of the price-setting process in a competitive electricity market. The first assumes that the firm is able to choose the price that maximizes its realized profits given the bids of its competitors and the realization of market demand. This procedure is straightforward to apply, but does not impose all of the market rules on the assumed price-setting process. The second procedure uses the assumption that the firm bids to maximize its expected profits. This procedure is considerably more complex, but can yield more insights about the nature of the firm's variable costs, because it allows the researcher to recover generation unit-level variable cost functions. These techniques are applied to bid, market outcomes and financial hedge contract data obtained from the first three months of operation of the National Electricity Market (NEM1) in Australia. The empirical analysis illustrates the usefulness of these techniques in measuring actual market power and the ability to exercise market power possessed by generation unit owners in competitive electricity markets.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8191.
Date of creation: Mar 2001
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Crawford, Gregory S. & Crespo, Joseph & Tauchen, Helen, 2007. "Bidding asymmetries in multi-unit auctions: Implications of bid function equilibria in the British spot market for electricity," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1233-1268, December.
- Holmberg, Pär & Newbery, David & Ralph, Daniel, 2009.
"Supply Function Equilibria: Step Functions and Continuous Representations,"
Working Paper Series
788, Research Institute of Industrial Economics.
- Holmberg, Pär & Newbery, David & Ralph, Daniel, 2013. "Supply function equilibria: Step functions and continuous representations," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1509-1551.
- Holmberg, P. & Newbery, D & Ralph, D., 2008. "Supply Function Equilibria: Step Functions and Continuous Representations," Cambridge Working Papers in Economics 0863, Faculty of Economics, University of Cambridge.
- Ciro Eduardo Bazán Navarro, 2004. "Análisis de la competencia en un mercado mayorista de electricidad: el caso de España," Documentos de trabajo conjunto ULL-ULPGC 2004-04, Facultad de Ciencias Económicas de la ULPGC.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.