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. 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. 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 04hicss.
Length: 12 pages
Date of creation: 2004
Date of revision: 2004
Publication status: Published in Proceedings of the Hawaii International Conference on System Sciences, January 2004.
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Postal: Economics Department, University of Maryland, College Park, MD 20742-7211
Phone: (202) 318-0520
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Auctions; Electricity Auctions; Market Design;
Other versions of this item:
- Peter Cramton, 2003. "Competitive Bidding Behavior in Uniform-Price Auction Markets," Papers of Peter Cramton 03ferc1, University of Maryland, Department of Economics - Peter Cramton, revised 2003.
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-09-30 (All new papers)
- NEP-COM-2004-09-30 (Industrial Competition)
- NEP-MIC-2004-09-30 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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