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Market Power and Efficiency in a Computational Electricity Market with Discriminatory Double-Auction Pricing

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Author Info

  • James Nicolaisen

    (Iowa State University)

  • Valentin Petrov

    (Iowa State University)

  • Leigh Tesfatsion

    (Iowa State University)

Abstract

This study reports experimental market power and efficiency outcomes for a computational wholesale electricity market operating in the short run under systematically varied concentration and capacity conditions. The pricing of electricity is determined by means of a clearinghouse double auction with discriminatory mid-point pricing. Buyers and sellers use Roth-Erev individual reinforcement learning to determine their price and quantity offers in each auction round. It is shown that market microstructure is strongly predictive for the relative market power of buyers and sellers, and that high market efficiency is generally attained. These findings are robust for tested changes in individual learning parameters. It is also shown that similar relative market power findings are obtained if the electricity buyer and seller populations instead each engage in social mimicry learning via a genetic algorithm. However, market efficiency is substantially reduced.

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File URL: http://128.118.178.162/eps/comp/papers/0004/0004005.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Computational Economics with number 0004005.

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Length: 25 pages
Date of creation: 11 Nov 2000
Date of revision:
Handle: RePEc:wpa:wuwpco:0004005

Note: Type of Document - pdf file; prepared on IBM PC -MSWord; to print on HP/PostScript/; pages: 25 ; figures: included
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Web page: http://128.118.178.162

Related research

Keywords: Wholesale electricity market; Electricity restructuring; Double auction; Market power; Efficiency; Concentration; Capacity; Agent-based computational economics; Roth-Erev reinforcement learning; Genetic algorithm social learning.;

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References

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  1. Green, Richard & Newbery, David M G, 1991. "Competition in the British Electricity Spot Market," CEPR Discussion Papers 557, C.E.P.R. Discussion Papers.
  2. Leigh Tesfatsion, 2000. "Structure, Behavior, and Market Power in an Evolutionary Labor Market with Adaptive Search," Computational Economics 0004002, EconWPA.
  3. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
  4. Vriend, Nicolaas J., 2000. "An illustration of the essential difference between individual and social learning, and its consequences for computational analyses," Journal of Economic Dynamics and Control, Elsevier, vol. 24(1), pages 1-19, January.
  5. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter.
  6. Paul Klemperer, 1999. "Auction Theory: A Guide to the Literature," Microeconomics 9903002, EconWPA.
  7. Bower, John & Bunn, Derek, 2001. "Experimental analysis of the efficiency of uniform-price versus discriminatory auctions in the England and Wales electricity market," Journal of Economic Dynamics and Control, Elsevier, vol. 25(3-4), pages 561-592, March.
  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. Rust, John & Miller, John H. & Palmer, Richard, 1994. "Characterizing effective trading strategies : Insights from a computerized double auction tournament," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 61-96, January.
  10. Roth, Alvin E. & Erev, Ido, 1995. "Learning in extensive-form games: Experimental data and simple dynamic models in the intermediate term," Games and Economic Behavior, Elsevier, vol. 8(1), pages 164-212.
  11. Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
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