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The Welfare Effects of Complementary Bidding Mechanisms

Mar Reguant
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Mar Reguant: MIT

No 1439, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: In many multi-unit auctions, bidders' valuations for a particular good depend on whether or not they also win the auction for another good. In these environments, the auctioneer can allow bidders to reflect these complementarities through additional bidding mechanisms. This paper studies the welfare effects of one such mechanism: "complex bids," a complementary bidding procedure used in wholesale electricity auctions that allows companies to specify a minimum revenue threshold for the day. Complex bids allow generating companies to explicitly link their valuations across different hours of the day, which would not be possible in an otherwise uniform price auction. The welfare implications of introducing such bidding procedures are ambiguous. Allowing for greater flexibility has the potential of improving the efficiency in the market, but also gives bidders an additional dimension through which they may exert market power. I develop a model of complex bidding and estimate its structural parameters in the context of the Spanish electricity market. I then perform a counterfactual analysis in which the original mechanism is compared to one in which complex bids are not allowed. I find that, while firms do exercise market power through complex bids, the positive coordination benefits of complex bidding dominate. The distributional implications of removing complex bids are particularly important. I find that, in the absence of complex bids, increased volatility due to less coordination could increase prices by 7.90%, translating into an increase of over 550M Euro of annual payments by consumers.

Date: 2011
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More papers in 2011 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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