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An Experimental Study of Complex-Offer Auctions from Wholesale Energy Markets

Author

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  • Rimvydas Baltaduonis

Abstract

A Payment Cost Minimization auction has been proposed as an alternative to the Offer Cost Minimization auction for use in wholesale electric power markets with an intention to lower procurement cost of electricity. Efficiency concerns have been raised for this proposal while assuming that the true production costs would be revealed to the auctioneer in a competitive market. Using an experimental approach, the study compares the performance of these two complex-offer auctions, controlling for the level of unilateral market power. The analysis finds that neither auction results in allocations that correspond to the true cost revelation. Two auctions perform similarly in terms of procurement cost and efficiency. Surprisingly, consumer prices in a competitive environment approach the prices of an environment with market power. It appears that the expected institutional effects for procurement cost and efficiency are greatly dominated by the effects of anti-competitive behavior due to the offer complexity and a cyclical nature of market demand.

Suggested Citation

  • Rimvydas Baltaduonis, 2014. "An Experimental Study of Complex-Offer Auctions from Wholesale Energy Markets," Applied Economics and Finance, Redfame publishing, vol. 1(1), pages 96-115, May.
    • Handle: RePEc:rfa:aefjnl:v:1:y:2014:i:1:p:96-115
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    More about this item

    Keywords

    avoidable fixed cost; complex-offer auction; cyclical demand; efficiency; electricity; two-part pricing;
    All these keywords.

    JEL classification:

    • Z0 - Other Special Topics - - General
    • A00 - General Economics and Teaching - - General - - - General

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