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Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels

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Abstract

A “pay-as-offered” or discriminatory price auction (DPA) has been proposed to solve the problem of inflated and volatile wholesale electricity prices. Using the experimental method we compare the DPA with a uniform price auction (UPA), strictly controlling for unilateral market power. We find that a DPA indeed substantially reduces price volatility. However, in a no market power design, prices in a DPA converge to the high prices of a uniform price auction with structural market power. That is, the DPA in a no market power environment is as anti-competitive as a UPA with structurally introduced market power.

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Authors and Affiliations

  1. Interdisciplinary Center for Economic Science, George Mason University, 4400 University Drive, Mail Stop 1B2, Fairfax, VA, 22030-4444

    Stephen J. Rassenti, Vernon L. Smith & Bart J. Wilson

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  1. Stephen J. Rassenti
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  2. Vernon L. Smith
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  3. Bart J. Wilson
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Correspondence to Bart J. Wilson.

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Rassenti, S.J., Smith, V.L. & Wilson, B.J. Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels. Journal of Regulatory Economics 23, 109–123 (2003). https://doi.org/10.1023/A:1022250812631

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  • DOI: https://doi.org/10.1023/A:1022250812631

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