On the Impact of Forward Contract Obligations in Multi-Unit Auctions

40 Pages Posted: 10 Jun 2008

See all articles by Maria Angeles de Frutos

Maria Angeles de Frutos

Universidad Carlos III de Madrid - Department of Economics

Natalia Fabra

Universidad Carlos III de Madrid - Departmento de Economia

Date Written: March 1, 2008

Abstract

Several regulatory authorities worldwide have recently imposed forward contract obligations on electricity producers as a way to mitigate their market power. In this paper we investigate how such contractual obligations affect equilibrium bidding in electricity markets, or in any other auction-based market. For this purpose, we introduce forward contracts in a uniform-price multi-unit auction model with complete information. We find that forward contracts are pro-competitive when allocated to relatively large and efficient firms; however, they might be anti-competitive otherwise. We also show that an increase in contract volume need not always be welfare improving. From a methodological point of view, we aim at contributing to the literature on multi-unit auctions with discrete bids.

Keywords: antitrust remedies, discrete bids, electricity, Forward contracts, market power, multi-unit auctions, simulations

JEL Classification: G13, L13, L94

Suggested Citation

de Frutos, Maria Angeles and Fabra, Natalia, On the Impact of Forward Contract Obligations in Multi-Unit Auctions (March 1, 2008). CEPR Discussion Paper No. DP6756, Available at SSRN: https://ssrn.com/abstract=1141661

Maria Angeles De Frutos (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

Natalia Fabra

Universidad Carlos III de Madrid - Departmento de Economia ( email )

E-28903 Getafe (Madrid)
Spain
+34-91 6249594 (Phone)
+34-91 6249329 (Fax)

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