Can a Newly Proposed Mechanism for Allocating Contracts in U.S. Electricity Wholesale Markets Lead to Lower Prices? A Game Theoretic Analysis

Vicki Knoblauch ()

No 2004-41, Working papers from University of Connecticut, Department of Economics

Abstract: This study of the wholesale electricity market compares the cost-minimizing performance of the auction mechanism currently in place in U.S. markets with the performance of a proposed replacement. The current mechanism chooses an allocation of contracts that minimizes a fictional cost calculated using pay-as-offer pricing. Then suppliers are paid the market clearing price. The proposed mechanism uses the market clearing price in the allocation phase as well as in the payment phase. In concentrated markets, the proposed mechanism outperforms the current mechanism even when strategic behavior by suppliers is taken into account. The advantage of the proposed mechanism increases with increased price competition.

Keywords: strategic behavior; multi-unit auction; electricity; Bertrand competition (search for similar items in EconPapers)
JEL-codes: C72 D44 L10 L94 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2004-04, Revised 2006-03
New Economics Papers: this item is included in nep-com, nep-ene, nep-gth and nep-mic
Note: The author would like to thank the National Science Foundation, under grant ECS# 0323685 for financial support. The author is grateful to the Engineering and Economics faculty and students at the University of Connecticut and Harvard working on the electricity project, the PI on the grant Peter Luh, David Pepyne, Shi-Chung Chang, William Blankson, Nicholas Shunda, Rimvydas Baltaduonis, Ying Chen, Feng Zhao and Yaming Ma. The author would like to thank in particular Peter Luh and William Blankson for explaining the MCP algorithm to her. The author would also like to thank Dan Kovenock for helpful comments on an earlier version of the paper entitled, "Strategic Behavior in Electricity Wholesale Markets" (2004).
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