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Bidding in an Electricity Pay-as-Bid Auction

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Author Info

  • Giulio Federico
  • David Rahman

Abstract

One of the main elements of the current reform of electricity trading in the UK is the change from a uniform price auction in the wholesale market to discriminatory pricing. We analyse this change under two polar market structures (perfectly competitive and monopolistic supply), with demand uncertainty. We find that under perfect competition there is a trade-off between efficiency and the level of consumer surplus betwen the two auction roles. We also establish that a move from uniform to discriminatory pricing under monopoly conditions has a negative impact on profits and output (weakly), a positive impact on consumer surplus, and ambiguous implications for welfare and average prices.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2001-W05.

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Date of creation: 01 Sep 2001
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Handle: RePEc:oxf:wpaper:2001-w05

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Keywords: Multi-Unit Auctions; Price discrimination; Electricity;

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References

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  1. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November.
  2. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  3. Nautz, D., 1995. "Optimal bidding in multi-unit auctions with many bidders," Economics Letters, Elsevier, vol. 48(3-4), pages 301-306, June.
  4. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  5. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002.
  6. 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.
  7. Robert G. Hansen, 1988. "Auctions with Endogenous Quantity," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 44-58, Spring.
  8. Von der Fehr, N.H.M. & Harbord, D., 1992. "Spot Market Competition in the UK Electricity Industry," Memorandum 09/1992, Oslo University, Department of Economics.
  9. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  10. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
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