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Optimal Bidding for a Bundle of Power Transmission Infrastructure Works

Author

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  • Hernando, Andres
  • Villena, Mauricio
  • Apablaza, Valentina

Abstract

We put forward an optimal bidding mechanism for a bundle of power transmission infrastructure works. Specifically, the regulator auctions two works altogether: one is to be developed and operated by the winning bidder, while the other is an owner-operated and financed expansion of an existing work. Participants bid jointly for both contracts, and the package is awarded based on the lowest total bid. The costs are divided into a common developing part for all participants and a private part related to financing. The optimal bidder offers the expected value of the costs, adjusted for the cost advantage over the second lowest bidder. This approach efficiently allocates the works to the firm with the lowest combined costs. However, rents persist due to the informational and cost advantage in financing. When a bidder expects higher costs, it requests a higher payment, which reduces its chances of winning the bid.

Suggested Citation

  • Hernando, Andres & Villena, Mauricio & Apablaza, Valentina, 2023. "Optimal Bidding for a Bundle of Power Transmission Infrastructure Works," MPRA Paper 120849, University Library of Munich, Germany, revised 30 Apr 2024.
    • Handle: RePEc:pra:mprapa:120849
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    References listed on IDEAS

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    More about this item

    Keywords

    Auctions; Procurement bidding; Infrastructure works bundling; Electric transmission infrastructure;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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