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.
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number
2004-41.
Length: 15 pages Date of creation: Apr 2004 Date of revision:
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). Contact details of provider: Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063 Phone: (860) 486-4889 Fax: (860) 486-4463 Web page: http://www.econ.uconn.edu/ More information through EDIRC
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Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D44 - Microeconomics - - Market Structure and Pricing - - - 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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