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Do pay-as-bid auctions favor collusion? - Evidence from Germany’s market for reserve power

  • Sven Heim

    ()

    (ZEW, University of Giessen)

  • Georg Götz

    ()

    (University of Giessen)

We analyze a drastic price increase in the German auction market for reserve power, which did not appear to be driven by increased costs. Studying the market structure and individual bidding strategies, we find evidence for collusive behavior in an environment with repeated auctions, pivotal suppliers and inelastic demand. The price increase can be traced back to an abuse of the auction’s pay-as-bid mechanism by the two largest firms. In contrast to theoretical findings, we show that pay-as-bid auctions do not necessarily reduce incentives for strategic capacity withholding and collusive behavior, but can even increase them.

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File URL: https://www.uni-marburg.de/fb02/makro/forschung/magkspapers/24-2013_heim.pdf
File Function: First 201324
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Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201324.

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Length: 17 pages
Date of creation: 2013
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:201324
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  1. Emmanuel Dechenaux & Dan Kovenock, 2005. "Tacit Collusion and Capacity Withholding in Repeated Uniform Price Auctions," UFAE and IAE Working Papers 645.05, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Joanne Evans and Richard Green, 2005. "Why Did British Electricity Prices Fall after 1998?," Discussion Papers 05-13, Department of Economics, University of Birmingham.
  3. Just, Sebastian & Weber, Christoph, 2008. "Pricing of reserves: Valuing system reserve capacity against spot prices in electricity markets," Energy Economics, Elsevier, vol. 30(6), pages 3198-3221, November.
  4. Natalia Fabra, 2003. "Tacit Collusion in Repeated Auctions: Uniform Versus Discriminatory," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 271-293, 09.
  5. Joskow, P. & Edward Kahn, 2002. "A Quantitative Analysis of Pricing Behavior In California’s Wholesale Electricity Market During Summer 2000," Cambridge Working Papers in Economics 0211, Faculty of Economics, University of Cambridge.
  6. Holmberg, Pär, 2009. "Supply Function Equilibria of Pay-as-Bid Auctions," Working Paper Series 787, Research Institute of Industrial Economics.
  7. Cabral, Luis, 2002. "The California energy crisis," Japan and the World Economy, Elsevier, vol. 14(3), pages 335-339, August.
  8. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter.
  9. Severin Borenstein & James Bushnell & Christopher R. Knittel, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 65-88.
  10. Swider, Derk J. & Weber, Christoph, 2007. "Bidding under price uncertainty in multi-unit pay-as-bid procurement auctions for power systems reserve," European Journal of Operational Research, Elsevier, vol. 181(3), pages 1297-1308, September.
  11. Hurlbut, David & Rogas, Keith & Oren, Shmuel, 2004. "Protecting the Market from "Hockey Stick" Pricing: How the Public Utility Commission of Texas is Dealing with Potential Price Gouging," The Electricity Journal, Elsevier, vol. 17(3), pages 26-33, April.
  12. Frank A. Wolak & Robert H. Patrick, 2001. "The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales Electricity Market," NBER Working Papers 8248, National Bureau of Economic Research, Inc.
  13. Kahn, Alfred E. & Cramton, Peter C. & Porter, Robert H. & Tabors, Richard D., 2001. "Uniform Pricing or Pay-as-Bid Pricing: A Dilemma for California and Beyond," The Electricity Journal, Elsevier, vol. 14(6), pages 70-79, July.
  14. Giulio Federico & David Rahman, 2001. "Bidding in an Electricity Pay-as-Bid Auction," Economics Series Working Papers 2001-W05, University of Oxford, Department of Economics.
  15. Müller, Gernot & Rammerstorfer, Margarethe, 2008. "A theoretical analysis of procurement auctions for tertiary control in Germany," Energy Policy, Elsevier, vol. 36(7), pages 2620-2627, July.
  16. Natalia Fabra & Juan Toro, 2003. "The Fall in British Electricity Prices: Market Rules, Market Structure, or Both?," Industrial Organization 0309001, EconWPA.
  17. Peter Cramton & Steven Stoft, 2007. "Why We Need to Stick with Uniform-Price Auctions in Electricity Markets," Papers of Peter Cramton 07cpm, University of Maryland, Department of Economics - Peter Cramton, revised 2007.
  18. Rothkopf, Michael H., 2002. "Control of Market Power in Electricity Auctions," The Electricity Journal, Elsevier, vol. 15(8), pages 15-24, October.
  19. Rassenti, Stephen J & Smith, Vernon L & Wilson, Bart J, 2003. "Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels," Journal of Regulatory Economics, Springer, vol. 23(2), pages 109-23, March.
  20. Catherine D. Wolfram, 1998. "Strategic Bidding in a Multiunit Auction: An Empirical Analysis of Bids to Supply Electricity in England and Wales," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 703-725, Winter.
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