Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2005:17: Comparing Supply Function Equilibria of Pay-as-Bid and Uniform-Price Auctions

Pär Holmberg ()
Additional contact information
Pär Holmberg: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: This paper derives a Supply Function Equilibrium (SFE) of a pay-as-bid auction, also called discriminatory auction. Such an auction is used in the balancing market for electric power in Britain. For some probability distributions of demand a pure-strategy equilibrium does not exist. If demand follows an inverse polynomial probability distribution, SFE always exists. Assuming this probability distribution, the pay-as-bid procurement auction is compared to a SFE of a uniform-price procurement auction, the auction form of most electric power markets. The demand-weighted average price is found to be equal or lower in the pay-as-bid procurement auction.

Keywords: Supply function equilibrium; pay-as-bid auction; uniform-price auction; discriminatory auction; oligopoly; capacity constraint; wholesale electricity market

JEL-codes: C62; D43; D44; L11; L13; L94

25 pages, May 16, 2005

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