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Price Instability in Multi-Unit Auctions

Author

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  • Edward Anderson

    (University of Sydney Business School, University of Sydney, Australia)

  • Pär Holmberg

    (Research Institute of Industrial Economics (IFN), Stockholm. Electricity Policy Research Group, University of Cambridge.)

Abstract

We consider a uniform-price procurement auction with indivisible units and private independent costs. We find an explicit solution for a Bayesian Nash equilibrium, which is unique if demand shocks are sufficiently evenly distributed. The equilibrium has a price instability in the sense that a minor change in a supplier's realized cost can result in a drastic change in the market price. We quantify the resulting volatility and show that it is reduced as the size of indivisible units decreases. In the limit, the equilibrium converges to the Supply Function Equilibrium (SFE) for divisible goods if costs are common knowledge.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Edward Anderson & Pär Holmberg, 2015. "Price Instability in Multi-Unit Auctions," Working Papers EPRG 1521, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
  • Handle: RePEc:enp:wpaper:eprg1521
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    Cited by:

    1. Holmberg, Pär & Tangerås, Thomas & Ahlqvist, Victor, 2018. "Central- versus Self-Dispatch in Electricity Markets," Working Paper Series 1257, Research Institute of Industrial Economics, revised 27 Mar 2019.
    2. Qunwei Wang & Cheng Cheng & Dequn Zhou, 2020. "Multi-round auctions in an emissions trading system considering firm bidding strategies and government regulations," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 25(7), pages 1403-1421, October.

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    More about this item

    Keywords

    Multi-unit auctions; indivisible unit; price instability; Bayesian Nash equilibria; supply function equilibria; convergence of Nash equilibria; whole- sale electricity markets;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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