Complementary bidding mechanisms and startup costs in electricity markets

Research output: Contribution to journalArticle

23 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1708-1742
Number of pages35
JournalReview of Economic Studies
Volume81
Issue number4
DOIs
StatePublished - Jan 1 2014

Keywords

  • Auctions with complementarities
  • Electricity markets
  • Market power
  • Startup costs

ASJC Scopus subject areas

  • Economics and Econometrics

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