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Strategic Bidding in Multi-unit Auctions with Capacity Constrained Bidders: The New York capacity market
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1028-3625
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EUI RSCAS; 2012/62; Loyola de Palacio Programme on Energy Policy; [Florence School of Regulation]; [Energy]
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SCHWENEN, Sebastian, Strategic Bidding in Multi-unit Auctions with Capacity Constrained Bidders: The New York capacity market, EUI RSCAS, 2012/62, Loyola de Palacio Programme on Energy Policy, [Florence School of Regulation], [Energy] - https://hdl.handle.net/1814/24537
Abstract
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.