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Discriminatory Versus Uniform-Price Electricity Auctions with Supply Function Equilibrium

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Abstract

The goal of this paper is to compare results for discriminatory auctions to results for uniform-price auctions when suppliers have capacity constraints. We have a pretty good understanding of what equilibrium results look like for the uniform-price auctions. But an unresolved problem is what happens when a discriminative auction is run and suppliers have capacity constraints. We formulate a supply function equilibrium model in continuous offer schedules with inelastic time-varying demand and with single-step marginal cost function to compare two auction institutions in the presence of capacity constraints. We show that payments made to the suppliers in the unique equilibrium of the discriminatory auction can be less than the payments in the uniform-price auction, depending on which uniform-price auction equilibrium is selected. For the high demand and/or low excess capacity cases, we characterize also mixed strategy supply function equilibrium under the discriminatory auction.

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Authors and Affiliations

  1. Department of Economics, University of Guelph, Guelph, ON, N1G2W1, Canada

    T. S. Genc

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  1. T. S. Genc
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Correspondence to T. S. Genc.

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Communicated by M.A. Simaan.

The author is grateful to Stanley S. Reynolds for helpful discussions and suggestions improving the manuscript. He thanks the Associate Editor and the anonymous referees for constructive remarks. He also thanks Bram Cadsby and the participants in the seminars at University of Toronto and HEC-Montreal for useful comments. This work was supported by the Social Sciences and Humanities Research Council of Canada.

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Genc, T.S. Discriminatory Versus Uniform-Price Electricity Auctions with Supply Function Equilibrium. J Optim Theory Appl 140, 9–31 (2009). https://doi.org/10.1007/s10957-008-9437-8

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