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Market power and information effects in a multi-unit auction

Author

Listed:
  • Andreas Hefti
  • Peiyao Shen
  • Regina Betz

Abstract

We study the effects of different information structures (full information, supply uncertainty and demand uncertainty) on equilibrium prices, allocative efficiency and bidding behavior in a (supply-side) uniform-price multi-unit auction, using supply function competition and a novel experimental design. Our setup integrates different types of market power and a varying level of competition. We empirically find that average prices tend to be higher under full information compared to the cases where bidders either have limited information about about the demand level or rivals’ technologies or; the latter even leading to strictly lower average prices as the exertion of market power and bid shading is strongly reduced. We explain this finding with a behavioral equilibrium concept, where bidders behave as if competing against the average market situation. Further, we address the problem of multiplicity of equilibria by exploiting the equilibrium conditions to obtain an empirical selection of the average equilibrium supply function. The respective predictions of the average prices exceed those by standard OLS in all information treatments.

Suggested Citation

  • Andreas Hefti & Peiyao Shen & Regina Betz, 2019. "Market power and information effects in a multi-unit auction," ECON - Working Papers 320, Department of Economics - University of Zurich.
  • Handle: RePEc:zur:econwp:320
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    File URL: http://www.econ.uzh.ch/static/wp/econwp320.pdf
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    References listed on IDEAS

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    Cited by:

    1. Brown, David P. & Eckert, Andrew, 2019. "Pricing Patterns in Wholesale Electricity Markets: Unilateral Market Power or Coordinated Behavior?," Working Papers 2019-9, University of Alberta, Department of Economics.
    2. Fabra, Natalia & Llobet, Gerard, 2019. "Auctions with Unknown Capacities: Understanding Competition among Renewables," CEPR Discussion Papers 14060, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Multi-unit auctions; limited information; market power; supply function competition; supply uncertainty; demand uncertainty; restricted least squares;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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