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

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  • Heim, Sven
  • Götz, Georg

Abstract

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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  • Heim, Sven & Götz, Georg, 2013. "Do pay-as-bid auctions favor collusion? Evidence from Germany's market for reserve power," ZEW Discussion Papers 13-035, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:13035
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    Cited by:

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    2. Merten, Michael & Olk, Christopher & Schoeneberger, Ilka & Sauer, Dirk Uwe, 2020. "Bidding strategy for battery storage systems in the secondary control reserve market," Applied Energy, Elsevier, vol. 268(C).
    3. Backer, Martijn & Keles, Dogan & Kraft, Emil, 2023. "The economic impacts of integrating European balancing markets: The case of the newly installed aFRR energy market-coupling platform PICASSO," Energy Economics, Elsevier, vol. 128(C).
    4. Poplavskaya, Ksenia & de Vries, Laurens, 2019. "Distributed energy resources and the organized balancing market: A symbiosis yet? Case of three European balancing markets," Energy Policy, Elsevier, vol. 126(C), pages 264-276.
    5. Fabian Ocker & Karl‐Martin Ehrhart & Marion Ott, 2018. "Bidding strategies in Austrian and German balancing power auctions," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 7(6), November.
    6. Poplavskaya, Ksenia & Lago, Jesus & de Vries, Laurens, 2020. "Effect of market design on strategic bidding behavior: Model-based analysis of European electricity balancing markets," Applied Energy, Elsevier, vol. 270(C).
    7. Bergler, Julian & Heim, Sven & Hüschelrath, Kai, 2017. "Strategic capacity withholding through failures in the German-Austrian electricity market," Energy Policy, Elsevier, vol. 102(C), pages 210-221.
    8. Viehmann, Johannes & Lorenczik, Stefan & Malischek, Raimund, 2018. "Multi-unit multiple bid auctions in balancing markets: an agent-based Q-learning approach," EWI Working Papers 2018-3, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    9. Natalia Wasilewska & Mirosław Wasilewski & Serhiy Zabolotnyy & Dmytro Osiichuk, 2022. "The Impact of M&As on the Competitive Positioning of European Energy Firms and Market Power Concentration on EU National Energy Markets," Energies, MDPI, vol. 15(23), pages 1-19, November.
    10. Esmaeili Aliabadi, Danial & Chan, Katrina, 2022. "The emerging threat of artificial intelligence on competition in liberalized electricity markets: A deep Q-network approach," Applied Energy, Elsevier, vol. 325(C).
    11. Brown, David P. & Eckert, Andrew & Silveira, Douglas, 2023. "Screening for Collusion in Wholesale Electricity Markets: A Review of the Literature," Working Papers 2023-7, University of Alberta, Department of Economics.
    12. Casimir Lorenz & Clemens Gerbaulet, 2017. "Wind Providing Balancing Reserves: An Application to the German Electricity System of 2025," Discussion Papers of DIW Berlin 1655, DIW Berlin, German Institute for Economic Research.
    13. Schillinger, Moritz, 2019. "Balancing Market Design and Opportunity Cost - The Swiss Case," Working papers 2019/14, Faculty of Business and Economics - University of Basel.
    14. Schillinger, Moritz, 2020. "Balancing-market design and opportunity cost: The Swiss case," Utilities Policy, Elsevier, vol. 64(C).
    15. Knaut, Andreas & Obermüller, Frank & Weiser, Florian, 2017. "Tender Frequency and Market Concentration in Balancing Power Markets," EWI Working Papers 2017-4, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    16. Dongwei Zhao & Audun Botterud & Marija Ilic, 2023. "Uniform Pricing vs Pay as Bid in 100%-Renewables Electricity Markets: A Game-theoretical Analysis," Papers 2305.12309, arXiv.org.
    17. Schillinger, Moritz & Weigt, Hannes, 2019. "Bidding into balancing markets in a hydro-dominated electricity system," Working papers 2019/13, Faculty of Business and Economics - University of Basel.
    18. Brown, David P. & Eckert, Andrew & Silveira, Douglas, 2023. "Screening for collusion in wholesale electricity markets: A literature review," Utilities Policy, Elsevier, vol. 85(C).

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    More about this item

    Keywords

    Auctions; Collusion; Market Power; Energy Markets; Reserve Power; Balancing Power;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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