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Tacit Collusion and Capacity Withholding in Repeated Uniform Price Auctions

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  • Dechenaux, Emmanuel
  • Kovenock, Dan

Abstract

This paper contributes to the study of tacit collusion by analyzing infinitely reaped multiunit uniform price auctions in a symmetric oligopoly with capacity constrained firms. Under both the Market Clearing and Maximum Accepted Price rules of determining the uniform price, we show that when each firm sets a price-quantity pair specifying the firm’s minimum acceptable price and the maximum quantity the firm is willing to sell at this price, there exists a range of discount factors for which the monopoly outcome with equal sharing is sustainable in the uniform price auction, but not in the corresponding discriminatory auction. Moreover, capacity withholding may be necessary to sustain this outcome. We extend these results to the case where firms may set bids that are arbitrary step functions of price-quantity pairs with any finite number of price steps. Surprisingly, under the Maximum Accepted Price rule, firms need employ no more than two price steps to minimize the value of the discount factor above which the perfectly collusive outcome with equal sharing is sustainable on a stationary path. Under the Market Clearing Price rule, only one step is required. That is, within the class of step bidding functions with a finite number of steps, maximal collusion is attained with simple price-quantity strategies exhibiting capacity withholding.

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Bibliographic Info

Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1174.

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Length: 37 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:pur:prukra:1174

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Keywords: Auction ; Capacity ; Collusion ; Electricity Market ; Supply Function;

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References

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  1. Natalia Fabra & Nils-Henrik von der Fehr & David Harbord, 2002. "Designing Electricity Auctions," Microeconomics 0211017, EconWPA, revised 31 Aug 2003.
  2. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers 31547, Iowa State University, Department of Economics.
  3. Severin Borenstein & James Bushnell & Steven Stoft, 1997. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," NBER Working Papers 6293, National Bureau of Economic Research, Inc.
  4. 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.
  5. Emmanuel Dechenaux & Dan Kovenock, 2011. "Endogenous rationing, price dispersion and collusion in capacity constrained supergames," Economic Theory, Springer, vol. 47(1), pages 29-74, May.
  6. Brock, William A & Scheinkman, Jose A, 1985. "Price Setting Supergames with Capacity Constraints," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 371-82, July.
  7. Deneckere, Raymond J & Kovenock, Dan, 1992. "Price Leadership," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 143-62, January.
    • Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Aitor Ciarreta & María Paz Espinosa, 2003. "Market Power In The Spanish Wholesale Electricity Market," Working Papers. Serie AD 2003-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  9. 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.
  10. Garcia-Diaz, Anton & Marin, Pedro L., 2003. "Strategic bidding in electricity pools with short-lived bids: an application to the Spanish market," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 201-222, February.
  11. Borenstein, Severin & Bushnell, James & Wolak, Frank, 2002. "Measuring Market Inefficiencies in California's Deregulated Electricity Industry," Staff General Research Papers 13136, Iowa State University, Department of Economics.
  12. Anette Boom, . "Investments in Electricity Generation Capacity under Different Market Structures with Price Responsive Demand," Papers 016, Departmental Working Papers.
  13. Davidson, Carl & Deneckere, Raymond, 1984. "Horizontal mergers and collusive behavior," International Journal of Industrial Organization, Elsevier, vol. 2(2), pages 117-132, June.
  14. Le Coq, Chloé, 2002. "Strategic use of available capacity in the electricity spot market," Working Paper Series in Economics and Finance 496, Stockholm School of Economics.
  15. Lambson, Val Eugene, 1987. "Optimal Penal Codes in Price-Setting Supergames with Capacity Constraints," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 385-97, July.
  16. Natalia Fabra, 2003. "Tacit Collusion in Repeated Auctions: Uniform Versus Discriminatory," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 271-293, 09.
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Cited by:
  1. Anderson, E.J. & Cau, T.D.H., 2011. "Implicit collusion and individual market power in electricity markets," European Journal of Operational Research, Elsevier, vol. 211(2), pages 403-414, June.
  2. Sven Heim & Georg Götz, 2013. "Do pay-as-bid auctions favor collusion? - Evidence from Germany’s market for reserve power," MAGKS Papers on Economics 201324, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Dechenaux, Emmanuel & Kovenock, Dan, 2003. "Endogenous Rationing, Price Dispersion, and Collusion in Capacity Constrained Supergames," Purdue University Economics Working Papers 1164, Purdue University, Department of Economics.
  4. Li, Hongyan & Tesfatsion, Leigh, 2012. "Co-learning patterns as emergent market phenomena: An electricity market illustration," Journal of Economic Behavior & Organization, Elsevier, vol. 82(2), pages 395-419.
  5. Joseph Mullins & Liam Wagner & John Foster, 2010. "Price Spikes in Electricity Markets: A Strategic Perspective," Energy Economics and Management Group Working Papers 05, School of Economics, University of Queensland, Australia.

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