Strategic Bidding in Multi-unit Auctions with Capacity Constrained Bidders: The New York Capacity Market

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• Sebastian Schwenen (EUI)
• Monday 27 May 2013, 12:30-14:00
• Castle Teaching Room, 4th floor, Cambridge Judge Business School, Trumpington Street, CB2 1AG.

If you have a question about this talk, please contact Andrew Pruitt.

This paper employs a simple model to describe bidding behavior in multi-unit uniform price procurement auctions when firms are capacity constrained. Using data from the New York City capacity auctions, I find that capacity constrained firms use simple bidding strategies to co-ordinate on an equilibrium that extracts high rents for all bidders. I show theoretically and empirically that the largest bidder submits the auction clearing bid. All other bidders submit infra-marginal bids that are low enough to not be profitably undercut. Infra-marginal bidders react to capacity endowments and decrease their bids as the largest firm’s capacities and its profits of undercutting increase. Capacity markets, when designed as studied here, are a costly tool to increase security of supply in electricity markets, as capacity prices do not reflect actual capacity scarcity.

This talk is part of the EPRG Energy and Environment (E&E) Series Easter 2013 series.

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• Castle Teaching Room, 4th floor, Cambridge Judge Business School, Trumpington Street, CB2 1AG

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