nach oben

Review of Industrial Organization

Erschienen in:

03.04.2024

The Auction of Contracts by Consumer Groups and the Effect on Market Power

verfasst von: Pablo Serra

Erschienen in: Review of Industrial Organization | Ausgabe 3/2024

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

This article discusses the auctioning of financial contracts by aggregations of consumers who aim to reduce the spot price of a concentrated industry’s product; this is a frequent arrangement in electricity markets. The contracts' underlying asset is the product; the auctions' bidding variable is the strike price; and the bidders are the producers. Using a three-stage complete-information game, we show that when all consumers belong to some group, in the subgame perfect Nash equilibrium, each group fully hedges its consumption, and total output reaches its efficient level. Otherwise, each group over-hedges its consumption, and total production is below the efficiency level.

Vorheriger Artikel Technology Licensing under Successive Monopoly

Nächster Artikel The Revenue Impact of Differential Seat Pricing and Competition in the Movie Theater Market

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

The marginal revenue of a producer that holds contracts equals the spot price plus the difference between its production and the sum of its contracted CfD units, times the inverse demand function's derivative.

Total output increases since a reduction in output leading to an increase in the spot price would be inconsistent with producers' expectations of a price decline. Therefore, the more contracted the industry, the higher the output and the lower the spot price (Wolak and Mc Rae, 2009; Borenstein, 2005).

The contract awardee's spot market profits increase because the other producers reduce their production unless the contracted CfD units is large relative to market output. The other producers' profits always fall.

The European Union Directive 2009/72/EC authorizes households and small and medium-sized consumers to aggregate their electricity purchases.

Regulations in Brazil and Chile oblige the local electricity distribution companies to auction procurement contracts for their consumers (see Moreno et al., 2010).

These characteristics include non-storability of the product, supply restricted to connected locations, short-term inelastic demand, and concentration of supply.

Forward trading makes firms' collusion more likely in a repeated game (Liski and Montero, 2014).

There is a similarity to a procurement auction.

Since bidders can anticipate the winning strike price, the auction format—public auction or sealed bid, first or second price—does not matter.

For instance, in 2018, the South Australian Chamber of Mines & Energy awarded an eight-year electricity supply contract to SIMEC Energy Australia.

These results are similar to those found by Powell (1993) in a model in which retailers—which are under the obligation to supply predetermined quantities of electricity at a regulated price—auction procurement contracts. In this context, he shows that retailers fully hedge their supply obligations, and both the spot price and the contracts’ strike prices equal the marginal cost.

Since the total number of CfD units does not change, the contract allocation among producers under certain conditions does not change the spot market equilibrium.

The benefit of a higher consumer surplus is of a lesser magnitude as the deviating group’s consumption rise is a fraction of its contract deviation.

Alperovich and Weksler (1996) derive a class of utility functions that yield demand functions that are locally linear in prices.

q = a is a kink-point of the profit function.

This assumption is not restrictive, since firms are unlikely to contract more CfD units than the quantity—a—at which the spot price drops to zero.

For the non-producing firms, it is less profitable to produce than for firm i, as their contracts are for fewer CfD units.

An alternative assumption would be that consumer groups choose the allocation of contracts that minimizes the weighted average of strike prices. This change would not significantly alter the analysis.

Further assuming that all the \(y^{\ell }\) meet the condition in Eq. 3, all contract winners would produce.

Consumer groups’ utility includes a third term that corresponds to the aggregate income of their members, other than contractual earnings, which we omit as it has no bearing on the game.

Adilov, N. (2012). Strategic use of forward contracts and capacity constraints. International Journal of Industrial Organization, 30(2), 164–173. https://doi.org/10.1016/j.ijindorg.2011.08.001CrossRef

Allaz, B., & Vila, J. L. (1993). Cournot competition, forward markets and efficiency. Journal of Economic Theory, 59(1), 1–16. https://doi.org/10.1006/jeth.1993.1001CrossRef

Alperovich, G., & Weksler, I. (1996). A class of utility functions yielding linear demand functions. The American Economist, 40(1), 20–23. https://doi.org/10.1177/056943459604000103CrossRef

Borenstein, S. (2005). The long-run efficiency of real-time electricity pricing. The Energy Journal, 26(3), 1–24. https://doi.org/10.2307/41319500CrossRef

Kreps, D., & Scheinkman, J. (1983). Amount Precommitment and Bertrand Competition Yield Cournot Outcomes. Bell Journal of Economics, 14(2), 326–337. https://doi.org/10.2307/3003636CrossRef

Liski, M., & Montero, J. P. (2014). Forward trading in exhaustible-resource oligopoly. Resource and Electricity Economics, 37, 122–146. https://doi.org/10.1016/j.reseneeco.2013.12.002CrossRef

Moreno, R., Barroso, L. A., Rudnick, H., Mocarquer, S., & Bezerra, B. (2010). Auction approaches of long-term contracts to ensure generation investment in electricity markets: Lessons from the Brazilian and Chilean experiences. Electricity Policy, 38(10), 5758–5769. https://doi.org/10.1016/j.enpol.2010.05.026CrossRef

Powell, A. (1993). Trading forward in an imperfect market: The case of electricity in Britain. Economic Journal, 103(417), 444–453. https://doi.org/10.2307/2234783CrossRef

Wolak, F. A. (2000). An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market. International Economic Journal, 14(2), 1–39. https://doi.org/10.1080/10168730000000017CrossRef

Wolak, F. A., & McRae, S. D. (2009). Merger analysis in restructured electricity supply industries. In J. E. Kwoka, & L. J. White (Eds.), The Antitrust Revolution, Economics, Competition, and Policy (5th ed., pp. 30–66). Oxford University Press.

Titel: The Auction of Contracts by Consumer Groups and the Effect on Market Power
verfasst von: Pablo Serra
Publikationsdatum: 03.04.2024
Verlag: Springer US
Erschienen in: Review of Industrial Organization / Ausgabe 3/2024
Print ISSN: 0889-938X
Elektronische ISSN: 1573-7160
DOI: https://doi.org/10.1007/s11151-024-09943-3

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft"

Springer Professional "Wirtschaft+Technik"

Weitere Artikel der Ausgabe 3/2024

Decentralization and Consumer Welfare with Substitutes or Complements

Dynamic Effects of Patent Pools: Evidence from Inter-Generational Competition in the Optical Disc Industry

The Revenue Impact of Differential Seat Pricing and Competition in the Movie Theater Market

Technology Licensing under Successive Monopoly

Unprofitable Cartels: Evidence from a Natural Experiment in the UK

Premium Partner