Journal
JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY
Volume 29, Issue 2, Pages 241-259Publisher
WILEY
DOI: 10.1111/jems.12340
Keywords
auctions; coordination; electricity; forward markets; volunteer's dilemma
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Funding
- Energiforsk research program EFORIS
- Marianne and Marcus Wallenberg foundation
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We study the use of financial contracts as bid-coordinating device in multi-unit uniform price auctions. Coordination is required whenever firms face a volunteer's dilemma in pricing strategies: one firm (the volunteer) is needed to increase the market clearing price. Volunteering, however, is costly, as inframarginal suppliers sell their entire capacity whereas the volunteer only sells residual demand. We identify conditions under which signing financial contracts solves this dilemma. We test our framework exploiting data on contract positions by large producers in the New York power market. Using a Monte Carlo simulation, we show that the contracting strategy is payoff dominant and provide estimates of the benefits of such strategy.
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