Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels

Stephen J Rassenti, Vernon Smith and Bart J. Wilson ()

Journal of Regulatory Economics, 2003, vol. 23, issue 2, pages 109-23

Abstract: A "pay-as-offered" or discriminatory price auction (DPA) has been proposed to solve the problem of inflated and volatile wholesale electricity prices. Using the experimental method we compare the DPA with a uniform price auction (UPA), strictly controlling for unilateral market power. We find that a DPA indeed substantially reduces price volatility. However, in a no market power design, prices in a DPA converge to the high prices of a uniform price auction with structural market power. That is, the DPA in a no market power environment is as anti-competitive as a UPA with structurally introduced market power. Copyright 2003 by Kluwer Academic Publishers

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