This article 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 procurement auctions for power generating capacity, I find that firms use simple bidding strategies to coordinate 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 inframarginal bids that are low enough to not be profitably undercut. Inframarginal bidders decrease their bids as the pivotal firm's capacities and its profits of undercutting increase."> This article 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 procurement auctions for power generating capacity, I find that firms use simple bidding strategies to coordinate 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 inframarginal bids that are low enough to not be profitably undercut. Inframarginal bidders decrease their bids as the pivotal firm's capacities and its profits of undercutting increase."> This article 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 Y">
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Strategic bidding in multi-unit auctions with capacity constrained bidders: the New York capacity market

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  • Sebastian Schwenen
Abstract
type="main"> This article 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 procurement auctions for power generating capacity, I find that firms use simple bidding strategies to coordinate 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 inframarginal bids that are low enough to not be profitably undercut. Inframarginal bidders decrease their bids as the pivotal firm's capacities and its profits of undercutting increase.

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  • Sebastian Schwenen, 2015. "Strategic bidding in multi-unit auctions with capacity constrained bidders: the New York capacity market," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 730-750, October.
    • Handle: RePEc:bla:randje:v:46:y:2015:i:4:p:730-750
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    Cited by:

    1. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2018. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Working Paper Series in Production and Energy 27, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    2. Chloé Le Coq & Sebastian Schwenen, 2020. "Financial contracts as coordination device," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(2), pages 241-259, April.
    3. Edward Anderson & Pär Holmberg, 2023. "Multi-unit auctions with uncertain supply and single-unit demand," Working Papers EPRG2310, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    4. Pio Baake & Sebastian Schwenen & Christian von Hirschhausen, 2020. "Local Power Markets," Discussion Papers of DIW Berlin 1904, DIW Berlin, German Institute for Economic Research.
    5. Holmberg, Pär & Tangerås, Thomas & Ahlqvist, Victor, 2018. "Central- versus Self-Dispatch in Electricity Markets," Working Paper Series 1257, Research Institute of Industrial Economics, revised 27 Mar 2019.
    6. Fabra, Natalia, 2018. "A primer on capacity mechanisms," Energy Economics, Elsevier, vol. 75(C), pages 323-335.
    7. Anderson, Edward & Holmberg, Pär, 2018. "Price instability in multi-unit auctions," Journal of Economic Theory, Elsevier, vol. 175(C), pages 318-341.
    8. Bohland, Moritz & Schwenen, Sebastian, 2022. "Renewable support and strategic pricing in electricity markets," International Journal of Industrial Organization, Elsevier, vol. 80(C).
    9. Pär Holmberg & Thomas Tangerås, 2021. "Strategic Reserves versus Market-wide Capacity Mechanisms," Working Papers EPRG2109, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    10. Anette Boom & Stefan Buehler, 2020. "Vertical structure and the risk of rent extraction in the electricity industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 210-237, January.
    11. Brown, David P., 2018. "Capacity payment mechanisms and investment incentives in restructured electricity markets," Energy Economics, Elsevier, vol. 74(C), pages 131-142.
    12. Moritz Bohland & Sebastian Schwenen, 2020. "Technology Policy and Market Structure: Evidence from the Power Sector," Discussion Papers of DIW Berlin 1856, DIW Berlin, German Institute for Economic Research.
    13. Chloé Coq & Henrik Orzen & Sebastian Schwenen, 2017. "Pricing and capacity provision in electricity markets: an experimental study," Journal of Regulatory Economics, Springer, vol. 51(2), pages 123-158, April.
    14. Sijing Deng & Jiayan Xu, 2020. "Ex ante and Ex post Subcontracting between Two Competing Bidders," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 37(01), pages 1-22, January.
    15. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2019. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Energy Economics, Elsevier, vol. 80(C), pages 1059-1078.
    16. Brown, David P. & Eckert, Andrew & Silveira, Douglas, 2023. "Screening for collusion in wholesale electricity markets: A literature review," Utilities Policy, Elsevier, vol. 85(C).

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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