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Auction Theory: A Guide to the Literature
 JOURNAL OF ECONOMIC SURVEYS
, 1999
"... This paper provides an elementary, nontechnical, survey of auction theory, by introducing and describing some of the critical papers in the subject. (The most important of these are reproduced in a companion book, The Economic Theory of Auctions, Paul Klemperer (ed.), Edward Elgar (pub.), forthco ..."
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Cited by 349 (2 self)
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This paper provides an elementary, nontechnical, survey of auction theory, by introducing and describing some of the critical papers in the subject. (The most important of these are reproduced in a companion book, The Economic Theory of Auctions, Paul Klemperer (ed.), Edward Elgar (pub.), forthcoming.) We begin with the most fundamental concepts, and then introduce the basic analysis of optimal auctions, the revenue equivalence theorem, and marginal revenues. Subsequent sections address riskaversion, affiliation, asymmetries, entry, collusion, multiunit auctions, double auctions, royalties, incentive contracts, and other topics. Appendices contain technical details, some simple worked examples, and a bibliography for each section.
An Empirical Analysis of the Potential for Market Power in California's Electricity Industry
, 1998
"... Using historical cost data, we simulate the California electricity market after deregulation as a static Cournot market with a competitive fringe. Our model indicates that, under the prederegulation structure of generation ownership, there is potential for significant market power in high demand ho ..."
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Cited by 76 (8 self)
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Using historical cost data, we simulate the California electricity market after deregulation as a static Cournot market with a competitive fringe. Our model indicates that, under the prederegulation structure of generation ownership, there is potential for significant market power in high demand hours, particularly in the fall and early winter months when hydroelectric output is at its lowest level relative to demand. The results also show that two of the most important factors in determining the extent and severity of market power are the level of available hydroelectric production and the elasticity of demand. * We would like to thank Shawn Bailey of Southern California Gas Co., and Philippe Auclair, Tom Flynn, and Mark Hesters of the California Energy Commission for their help in providing data and input, Richard Green, William Hogan, Paul Joskow, Ed Kahn, Christopher Knittel, Mike Waterson, Frank Wolak, and two anonymous referees for their helpful comments, and Haru Connolly, Wedad Elmaghraby, and, especially, Christopher Knittel for their excellent research assistance. This research was partially funded by the California Energy Commission under contract # 30095007. 2 1.
Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market
, 2002
"... We present a method for decomposing wholesale electricity payments into production costs, inframarginal competitive rents, and payments resulting from the exercise of market power. The method also parses actual variable costs into the minimum variable costs necessary to meet demand and increased pro ..."
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Cited by 68 (10 self)
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We present a method for decomposing wholesale electricity payments into production costs, inframarginal competitive rents, and payments resulting from the exercise of market power. The method also parses actual variable costs into the minimum variable costs necessary to meet demand and increased production costs caused by market power and other market ineciencies. Using data from June 1998 to October 2000 in California, we nd signicant departures from competitive pricing, particularly during the highdemand summer months. Electricity expenditures in the state's restructured wholesale market rose from $2.04 billion in summer 1999 to $8.98 billion in summer 2000. We nd that 21% of this increase was due to increased production costs, 20% was due to increased competitive rents, and the remaining 59% was attributable to increased market power.
The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry
 Rand Journal of Economics
, 2000
"... In an unregulated electricity generation market, the capacity of transmission lines will determine the degree to which generators in different locations compete with one another. We show, however, that there may be no relationship between the effect of a transmission line in spurring competition and ..."
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Cited by 65 (7 self)
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In an unregulated electricity generation market, the capacity of transmission lines will determine the degree to which generators in different locations compete with one another. We show, however, that there may be no relationship between the effect of a transmission line in spurring competition and the actual electricity that flows on the line in equilibrium. We also demonstrate that limited transmission capacity can give a firm the incentive to restrict its output in order to congest transmission into its area of dominance. As a result, relatively small investments in transmission may yield surprisingly large payoffs in terms of increased competition. We demonstrate these effects in the context of the deregulated California electricity market. 1.
An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity
 Market, International Economic Journal
, 2000
"... I would like to thank Jun Ishii and Marshall Yan for outstanding research assistance. Partial financial support for this research was provided by the National Science Foundation. I would also like to thank Severin Borenstein, Jim Bushnell, This paper derives a model of bidding behavior in a competit ..."
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Cited by 52 (9 self)
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I would like to thank Jun Ishii and Marshall Yan for outstanding research assistance. Partial financial support for this research was provided by the National Science Foundation. I would also like to thank Severin Borenstein, Jim Bushnell, This paper derives a model of bidding behavior in a competitive electricity market which incorporates the impact of the electricity generatorâ€™s position in the hedge contract market on its expected profitmaximizing bidding behavior. 1 The model is first used to characterize the profitmaximizing market price that a generator would like set by its bidding strategy for several hedge
Capacity Constrained Supply Function Equilibrium Models of Electricity Markets: Stability, Nondecreasing Constraints, and Function Space Iterations
 University of California Energy Institute
, 2002
"... In this paper we consider a supply function model of an electricity market where strategic firms have capacity constraints. We show that if firms have heterogeneous cost functions and capacity constraints then the differential equation approach to finding the equilibrium supply function may not b ..."
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Cited by 34 (4 self)
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In this paper we consider a supply function model of an electricity market where strategic firms have capacity constraints. We show that if firms have heterogeneous cost functions and capacity constraints then the differential equation approach to finding the equilibrium supply function may not be effective by itself because it produces supply functions that fail to be nondecreasing. Even when the differential equation approach yields solutions that satisfy the nondecreasing constraints, many of the equilibria are unstable, restricting the range of the equilibria that are likely to be observed in practice. We analyze the nondecreasing constraints and characterize piecewise continuously differentiable equilibria. To find stable equilibria, we numerically solve for the equilibrium by iterating in the function space of allowable supply functions. Using a numerical example based on supply in the England and Wales market in 1999, we investigate the potential for multiple equilibria and the interaction of capacity constraints, price caps, and the length of the time horizon over which bids must remain unchanged.
Oligopolistic Competition in Power Networks: A Conjectured Supply Function Approach
 IEEE Transactions on Power Systems
, 2002
"... Conjectured supply function (CSF) models of competition among power generators on a linearized DC network are presented. As a detailed survey of the power market modeling literature shows, CSF models differ from previous approaches in that they represent each GenCo's conjectures regarding how rival ..."
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Cited by 32 (6 self)
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Conjectured supply function (CSF) models of competition among power generators on a linearized DC network are presented. As a detailed survey of the power market modeling literature shows, CSF models differ from previous approaches in that they represent each GenCo's conjectures regarding how rival firms will adjust sales in response to price changes. The CSF approach is a more realistic and flexible framework for modeling imperfect competition than other models for three reasons. First, the models include as a special case the Cournot conjecture that rivals will not change production if prices change; thus, the CSF framework is more general. Second, Cournot models cannot be used when price elasticity of demand is zero, but the proposed models can. Third, unlike supply function equilibrium models, CSF equilibria can be calculated for large transmission networks. Existence and uniqueness properties for prices and profits are reported. An application shows how transmission limits and strategic interactions affect equilibrium prices under forced divestment of generation.
Identification and Estimation of Cost Functions Using Observed Bid Data: An Application to Electricity Markets
 in Advances in Economics and Econometrics  Theory and Applications, Eighth World Congress
, 2003
"... provided very helpful comments on previous drafts. Partial financial support for this research was provided This paper presents several techniques for recovering cost function estimates for electricity generation from a model of optimal bidding behavior in a competitive electricity market. Two techn ..."
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Cited by 28 (3 self)
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provided very helpful comments on previous drafts. Partial financial support for this research was provided This paper presents several techniques for recovering cost function estimates for electricity generation from a model of optimal bidding behavior in a competitive electricity market. Two techniques are developed based on different models of the pricesetting process in a competitive electricity market. The first assumes that the firm chooses the price that maximizes its realized profits given the bids of its competitors and the realization of market demand. This procedure is straightforward to apply, but does not impose all of the market rules on the assumed pricesetting process. The second procedure uses the assumption that the firm bids in accordance with the market rules to maximize its expected profits. This procedure is considerably more complex, but yields more insights about the nature of the firmâ€™s variable costs, because it allows the researcher to recover generation unitlevel variable cost functions. These techniques are applied to bid, market outcomes and financial hedge contract data obtained from the first three months of operation of the National Electricity Market (NEM1) in Australia. The empirical analysis illustrates the usefulness of these techniques in measuring actual market power and the ability to exercise market power possessed by generation unit owners in competitive electricity markets
Theory and application of linear supply function equilibrium in electricity markets
 Journal of Regulatory Economics
, 2004
"... We consider a supply function equilibrium (SFE) model of interaction in an electricity market. We assume a linear demand function and consider a competitive fringe and several strategic players having capacity limits and affine marginal costs. The choice of SFE over Cournot equilibrium and other mod ..."
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Cited by 25 (3 self)
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We consider a supply function equilibrium (SFE) model of interaction in an electricity market. We assume a linear demand function and consider a competitive fringe and several strategic players having capacity limits and affine marginal costs. The choice of SFE over Cournot equilibrium and other models and the choice of affine marginal costs is reviewed in the context of the existing literature. We assume that bid rules allow affine or piecewise affine nondecreasing supply functions by firms and extend results of Green and Rudkevitch concerning the linear SFE solution. An incentive compatibility result is proved. We also find that a piecewise affine SFE can be found easily for the case where there are nonnegativity limits on generation. Upper capacity limits, however, pose problems and we propose an ad hoc approach. 1 We apply the analysis to the England and Wales electricity market, considering the 1996 and 1999 divestitures. The piecewise affine SFE solutions generally provide better matches to the empirical data than previous analysis.