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Can a Newly Proposed Mechanism for Allocating Contracts in U.S. Electricity Wholesale Markets Lead to Lower Prices? A Game Theoretic Analysis

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  • Vicki Knoblauch

    (University of Connecticut)

Abstract

This study of the wholesale electricity market compares the cost-minimizing performance of the auction mechanism currently in place in U.S. markets with the performance of a proposed replacement. The current mechanism chooses an allocation of contracts that minimizes a fictional cost calculated using pay-as-offer pricing. Then suppliers are paid the market clearing price. The proposed mechanism uses the market clearing price in the allocation phase as well as in the payment phase. In concentrated markets, the proposed mechanism outperforms the current mechanism even when strategic behavior by suppliers is taken into account. The advantage of the proposed mechanism increases with increased price competition.

Suggested Citation

  • Vicki Knoblauch, 2004. "Can a Newly Proposed Mechanism for Allocating Contracts in U.S. Electricity Wholesale Markets Lead to Lower Prices? A Game Theoretic Analysis," Working papers 2004-41, University of Connecticut, Department of Economics, revised Mar 2006.
  • Handle: RePEc:uct:uconnp:2004-41
    Note: The author would like to thank the National Science Foundation, under grant ECS# 0323685 for financial support. The author is grateful to the Engineering and Economics faculty and students at the University of Connecticut and Harvard working on the electricity project, the PI on the grant Peter Luh, David Pepyne, Shi-Chung Chang, William Blankson, Nicholas Shunda, Rimvydas Baltaduonis, Ying Chen, Feng Zhao and Yaming Ma. The author would like to thank in particular Peter Luh and William Blankson for explaining the MCP algorithm to her. The author would also like to thank Dan Kovenock for helpful comments on an earlier version of the paper entitled, "Strategic Behavior in Electricity Wholesale Markets" (2004).
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    References listed on IDEAS

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    1. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1366-1400.
    2. Le Coq, Chloé, 2002. "Strategic use of available capacity in the electricity spot market," SSE/EFI Working Paper Series in Economics and Finance 496, Stockholm School of Economics.
    3. Spear, Stephen E., 2003. "The electricity market game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 300-323, April.
    4. Supatgiat, Chonawee & Zhang, Rachel Q & Birge, John R, 2001. "Equilibrium Values in a Competitive Power Exchange Market," Computational Economics, Springer;Society for Computational Economics, vol. 17(1), pages 93-121, February.
    5. Alfred E. Kahn & Peter Cramton & Robert H. Porter & Richard D. Tabors, 2001. "Pricing in the California Power Exchange Electricity Market: Should California Switch from Uniform Pricing to Pay-as-Bid Pricing?," Papers of Peter Cramton 01calpx, University of Maryland, Department of Economics - Peter Cramton, revised 27 Jan 2001.
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    More about this item

    Keywords

    strategic behavior; multi-unit auction; electricity; Bertrand competition;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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