Journal Article

Complementary Bidding Mechanisms and Startup Costs in Electricity Markets

Mar Reguant

in The Review of Economic Studies

Volume 81, issue 4, pages 1708-1742
Published in print October 2014 | ISSN: 0034-6527
Published online June 2014 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1093/restud/rdu022
Complementary Bidding Mechanisms and Startup Costs in Electricity Markets

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  • Energy and Utilities
  • Market Structure and Pricing
  • Market Structure, Firm Strategy, and Market Performance

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I extend multi-unit auction estimation techniques to a setting in which firms can express cost complementarities over time. In the context of electricity markets, I show how the auction structure and bidding data can be used to estimate these complementarities, which in these markets arise due to startup costs. I find that startup costs are substantial and that taking them into account helps better explain firm bidding strategies and production patterns. As in other dynamic settings, I find that startup costs limit the ability of firms to change production over time, exacerbating fluctuations in market prices. These fluctuations can induce estimates of market power that ignore dynamic costs to overstate markup volatility, with predicted markups that can be even negative in periods of low demand. I show how accounting for startup costs can provide a natural correction for these markup biases.

Keywords: Auctions with complementarities; Electricity markets; Startup costs; Market power; L13; L94; D44

Journal Article.  16987 words.  Illustrated.

Subjects: Energy and Utilities ; Market Structure and Pricing ; Market Structure, Firm Strategy, and Market Performance

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