Price Instability in Multi-Unit Auctions

Edward Anderson and Pär Holmberg

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We consider a procurement auction, where each supplier has private costs and submits a stepped supply function. We solve for a Bayesian Nash equilibrium and show that the equilibrium has a price instability in the sense that a minor change in a supplier’s cost sometimes result in a major change in the market price. In wholesale electricity markets, we predict that the bid price of the most expensive production unit can change by 1-10% due to price instability. The price instability is reduced when suppliers have more steps in their supply functions for a given production technology. In the limit, as the number of steps increases and the cost uncertainty decreases, the Bayesian equilibrium converges to a pure-strategy NE without price instability, the Supply Function Equilibrium (SFE).

Keywords: Multi-unit auctions; indivisible unit; price instability; Bayesian Nash equilibria; supply function equilibria; convergence of Nash equilibria; wholesale electricity markets (search for similar items in EconPapers)
JEL-codes: C62 C72 D43 D44 L94 (search for similar items in EconPapers)
Date: 2015-12-03
New Economics Papers: this item is included in nep-ene and nep-env
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https://www.econ.cam.ac.uk/sites/default/files/pub ... pe-pdfs/cwpe1538.pdf

Related works:
Journal Article: Price instability in multi-unit auctions (2018)
Working Paper: Price Instability in Multi-Unit Auctions (2015)
Working Paper: Price Instability in Multi-Unit Auctions (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1538

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