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Efficiency in Deregulated Electricity Markets: Offer Cost Minimization vs. Payment Cost Minimization Auction

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  • Rimvydas Baltaduonis

    (University of Connecticut)

Abstract

This study of the wholesale electricity market compares the efficiency performance of the auction mechanism currently in place in U.S. markets with the performance of a proposed mechanism. The analysis highlights the importance of considering strategic behavior when comparing different institutional systems. We find that in concentrated markets, neither auction mechanism can guarantee an efficient allocation. The advantage of the current mechanism increases with increased price competition if market demand is perfectly inelastic. However, if market demand has some responsiveness to price, the superiority of the current auction with respect to efficiency is not that obvious. We present a case where the proposed auction outperforms the current mechanism on efficiency even if all offers reflect true production costs. We also find that a market designer might face a choice problem with a tradeoff between lower electricity cost and production efficiency. Some implications for social welfare are discussed as well.

Suggested Citation

  • Rimvydas Baltaduonis, 2006. "Efficiency in Deregulated Electricity Markets: Offer Cost Minimization vs. Payment Cost Minimization Auction," Working papers 2006-04, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2006-04
    Note: The author would like to thank the National Science Foundation for financial support under grant ECS-0323685. The author is grateful to the Engineering and Economics faculty and students at the University of Connecticut working on the electricity project, especially to the PI on the grant Peter Luh and Senior Economist Vicki Knoblauch.
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    File URL: http://web2.uconn.edu/economics/working/2006-04.pdf
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    References listed on IDEAS

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    1. Yan, Joseph H. & Stern, Gary A., 2002. "Simultaneous Optimal Auction and Unit Commitment for Deregulated Electricity Markets," The Electricity Journal, Elsevier, vol. 15(9), pages 72-80, November.
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    Cited by:

    1. Rimvydas Baltaduonis, 2007. "An Experimental Study of Complex-Offer Auctions: Payment Cost Minimization vs. Offer Cost Minimization," Working papers 2007-13, University of Connecticut, Department of Economics.
    2. Rimvydas Baltaduonis, 2007. "Simple-Offer vs. Complex-Offer Auctions in Deregulated Electricity Markets," Working papers 2007-14, University of Connecticut, Department of Economics.

    More about this item

    Keywords

    strategic behavior; multi-unit auction; efficiency; electricity;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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