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Price Instability in Multi-Unit Auctions


Type

Working Paper

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Authors

Anderson, E. 
Holmberg, P. 

Abstract

We consider a procurement auction, where each supplier has private costs and submits a stepped supply function. We solve for a Bayesian Nash equilibrium and show that the equilibrium has a price instability in the sense that a minor change in a supplier's cost sometimes result in a major change in the market price. In wholesale electricity markets, we predict that the bid price of the most expensive production unit can change by 1-10% due to price instability. The price instability is reduced when suppliers have more steps in their supply functions for a given production technology. In the limit, as the number of steps increases and the cost uncertainty decreases, the Bayesian equilibrium converges to a pure-strategy NE without price instability, the Supply Function Equilibrium (SFE).


convergence of Nash equilibria

Description

Keywords

Multi-unit auctions, indivisible unit, price instability, Bayesian Nash equilibria, supply function equilibria, wholesale electricity markets

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Publisher

Faculty of Economics

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