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

  • Heim, Sven
  • Götz, Georg

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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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 13-035.

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Date of creation: 2013
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Handle: RePEc:zbw:zewdip:13035
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  15. 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.
  16. 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.
  17. Cabral, Luis, 2002. "The California energy crisis," Japan and the World Economy, Elsevier, vol. 14(3), pages 335-339, August.
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