The Auction of Contracts by Consumer Groups and the Effect on Market Power

Pablo Serra

Review of Industrial Organization, 2024, vol. 64, issue 3, No 2, 359 pages

Abstract: Abstract This article discusses the auctioning of financial contracts by aggregations of consumers who aim to reduce the spot price of a concentrated industry’s product; this is a frequent arrangement in electricity markets. The contracts' underlying asset is the product; the auctions' bidding variable is the strike price; and the bidders are the producers. Using a three-stage complete-information game, we show that when all consumers belong to some group, in the subgame perfect Nash equilibrium, each group fully hedges its consumption, and total output reaches its efficient level. Otherwise, each group over-hedges its consumption, and total production is below the efficiency level.

Keywords: Contracts; Auctions; Consumer groups; Electricity markets (search for similar items in EconPapers)
JEL-codes: L1 L3 L9 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11151-024-09943-3

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