Abstract
We describe a Vickrey-Clarke-Groves auction for supply and demand bidding in the face of market power and nonconcave benefits in which bidders are motivated to bid truthfully, and evaluate its use for power and gas pipeline capacity auctions. The auction efficiently allocate resources if firms maximize profit. Simulations, including an application to the PJM power market, illustrate the procedure. However, the auction has several undesirable properties. It risks being revenue deficient, can be gamed by cooperating suppliers and consumers, and is subject to the information revelation and bid-taker cheating concerns that make single item Vickrey auctions rare.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Ausubel, L. M., P. Cramton, R. P. McAfee, and J. McMillan. 1997. “Synergies in Wireless Telephony: Evidence from the Broadband PCS Auctions.” Journal of Economics and Management Strategy 6: 497–527.
Bushnell, J. B., and S. S. Oren. 1994. “Bidder Cost Revelation in Electric Power Auctions.” Journal of Regulatory Economics 6(1): 5–26.
Clarke, E. 1971. “Multipart Pricing of Public Goods.” Public Choice 2(1): 19–33.
Elmaghraby, W., and S. S. Oren, 1999. “The Efficiency of Multi-unit Electricity Auctions.” Energy Journal 20(4): 89–116.
Engelbrecht-Wiggans, R. 1980. “Auctions and Bidding Models.” Management Science 26(1): 119–142.
Engelbrecht-Wiggans, R., and C. M. Kahn. 1991. “Protecting the Winner: Second-Price versus Oral Auctions.” Economics Letters 35: 243–248.
Federal Energy Regulatory Commission. 1998. Technical Conference, “In the Matter of Natural Gas Pipeline Company of America,” Docket No. RP 97-431, May 19–20.
Graham, D., and R. Marshall. 1987. “Collusive Bidder Behavior at Single-Object Second-Price and English Auctions,” Journal of Political Economy 95: 1217–1239.
Groves, T. 1973. “Incentives in Teams.” Econometrica 41: 617–631.
Harstad, R. M., M. H. Rothkopf, and K. Wahrer. 1996. “Efficiency in Auctions When Bidders Have Private Information About Competitors.” In Advances in Applied Micro-Economics, Vol. 6, edited by M. Baye. Greenwich, CT: JAI Press.
Johnson, R. B., S. S. Oren, and A. J. Svoboda. 1997. “Equity and Efficiency of Unit Commitment in Competitive Electricity Markets.” Utilities Policy 6(1): 9–20.
Johnson, R. B., and A. J. Svoboda. 1996. “Incentive Effects of Power Exchange Auction Proposals.” Mimeo, Pacific Gas & Electric Co., San Francisco, CA.
Johnson, R. B., A. J. Svoboda, C. Greif, A. Vojdani, and F. Zhuang. 1998. “Positioning for a Competitive Electric Industry with PG&E's Hydro-Thermal Optimization.” Interfaces 28(1): 53–74.
Krishna, V., and M. Perry. 1998. Efficient Mechanism Design. Mimeo, Department of Economics, Pennsylvania State University, State College, PA.
Mackie-Mason, J. K. 1994. A Spatial `Smart Market’ for Electric Power and Transmission. Mimeo, Dept. of Economics, University of Michigan, Ann Arbor, MI.
Mas-Colell, A., M. Whinston, and J. R. Green. 1995. Microeconomic Theory. Oxford University Press, New York, Ch. 25.
McAfee, R. P., and J. McMillan. 1987. “Auctions and Bidding.” Journal of Economic Literature 25: 699–738.
McGuire, B. 1997. Power Auctions and Intertemporal Produciton Costs: Dealing with Unit Commitment. Mimeo, University of California Energy Institute, Berkeley, CA.
Myerson, R. B., and M. A. Satterthwaite. 1983. “Efficient Mechanisms for Bilateral Trading.” Journal of Economic Theory 29: 265–281.
Robinson, M. S. 1985. “Collusion and the Choice of Auction.” Rand Journal of Economics 16: 141–145.
Rothkopf, M. H. 1994. “Models of Auctions and Competitive Bidding.” In Handbooks in Operations Research, Vol. 6: Operations Research and the Public Sector, edited by S. M Pollack, M. H. Rothkopf and A. Barnett. New York: Elsevier Science.
Rothkopf, M. H. 1999. “Daily Repetition: A Neglected Factor in the Analysis of Electricity Auctions.” The Electricity Journal 12(3): 60–70.
Rothkopf, M. H., and R. M. Harstad. 1994. “Modeling Competitive Bidding: A Critical Essay.” Management Science 40: 364–384.
Rothkopf, M. H., and R. M. Harstad. 1995. “Two Models of Bid-Taker Cheating in Vickrey Auctions.” Journal of Business 68: 257–267.
Rothkopf, M. H., A. Pekec, and R. M. Harstad. 1998. “Computationally Manageable Combinational Auctions.” Management Science 44(8): 1131–1147.
Rothkopf, M. H., T. J. Teisberg, and E. P. Kahn. 1990. “Why are Vickrey Auctions Rare?” Journal of Political Economy 98(1): 94–109.
Vickrey, W. 1961. “Counterspeculation, Auctions, andCompetitive SealedTenders.” Journal of Finance 16: 8–37.
Wilson, R. B. 1993. “Strategic Analysis of Auctions.” In The Handbook of Game Theory, edited by R. Auman and S. Hart. Amsterdam: North Holland.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Hobbs, B.F., Rothkopf, M.H., Hyde, L.C. et al. Evaluation of a Truthful Revelation Auction in the Context of Energy Markets with Nonconcave Benefits. Journal of Regulatory Economics 18, 5–32 (2000). https://doi.org/10.1023/A:1008151712010
Issue Date:
DOI: https://doi.org/10.1023/A:1008151712010