Competitive Bidding Behavior in Uniform-Price Auction Markets
AbstractProfit-maximizing bidding in uniform price auction markets involves bidding above marginal cost. It therefore is not surprising that such behavior is observed in electricity markets. Common bidding behavior such as "hockey stick" bids easily are explained by suppliers determining their supply offers to maximize profits. This incentive to bid above marginal cost is not the result of coordinated action among the bidders. Rather, each bidder is independently selecting its bid to maximize profits based on its estimate of the residual demand curve it faces. Profit-maximizing bidding does not mean that "the sky’s the limit." Typically, bidders are limited in how high they want to bid. As prices increase, operators become increasingly concerned that their capacity will not be selected—that someone else will step in front of them in the merit order. Only when (1) demand does not respond to price, and (2) the largest unhedged block of capacity is essential to meet demand can the bidder holding this largest block profitably name any price. In all other cases, the supplier bids a price for its energy capacity to optimize its marginal tradeoff between higher prices and lower quantities. Price response from either demand or other suppliers prevents the supplier from raising its bid too much. Profit maximizing bidding should be expected and encouraged by regulators. It is precisely this profit maximizing behavior that guides the market toward long-run efficient outcomes.
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Bibliographic InfoPaper provided by University of Maryland, Department of Economics - Peter Cramton in its series Papers of Peter Cramton with number 03ferc1.
Length: 38 pages
Date of creation: 2003
Date of revision: 2003
Publication status: Published in Report before the Federal Energy Regulatory Commission, March 2003.
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Postal: Economics Department, University of Maryland, College Park, MD 20742-7211
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Auctions; Electricity Auctions; Market Design;
Other versions of this item:
- Peter Cramton, 2004. "Competitive Bidding Behavior in Uniform-Price Auction Markets," Papers of Peter Cramton, University of Maryland, Department of Economics - Peter Cramton 04hicss, University of Maryland, Department of Economics - Peter Cramton, revised 2004.
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
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