No abstract

Combinatorial auctions allow for more expressive bidding in which participants can submit package bids with logical constraints that limit allowable outcomes. This type of auction can be useful when participants' values are complementary or when participants have production and financial constraints. However, combinatorial auctions are currently rare in practice. The main problems confronted in implementing these auctions are that they have computational uncertainty (i.e., there is no guarantee that the winning bids for such an auction can be found in a ''reasonable'' amount of time when the number of bidders and items becomes larger) and that the auction is cognitively complex and can lead participants to pursue perverse bidding strategies. This article describes a type of combinatorial auction that, during laboratory testing, eliminated these problems and produced extremely efficient outcomes.

The Federal Communications Commission uses an ascending bid auction called the Simultaneous Multi-round Auction (SMA) to assign spectrum for personal communication service licenses. Congress recently mandated that the SMA be evaluated to determine if it could be modified to allow "combinatorial" bids for packages of licenses. We review the theoretical background and prior experimental evidence relevant to the SMA procedures and their inherent defects which are driven largely by the presumption that values are common or affiliated and that bidder identities must be revealed in real time. We present results from experiments to evaluate the SMA and some its more important rules, along with a comparative test of the SMA with a combinatorial auction specifically designed for the Federal Communications Commission by Charles River and Associates. We find that several of the SMA rules hinder efficiency and create a trade-off between efficiency and time to complete the auction. In addition, when license values are superadditive the combinatorial auction outperforms the SMA, but requires much more time to complete and is not robust with respect to boundary cases.

No abstract

In this article we report an experiment that examines how demandside bidding can discipline generators in a market for electric power. First we develop a treatment without demand-side bidding; two large firms are allocated baseload and intermediate cost generators such that either firm might unilaterally withhold the capacity of its intermediate cost generators from the market to benefit from the supracompetitive prices that would result from only selling its baseload units. In a converse treatment, ownership of some of the intermediate cost generators is transferred from each of these firms to two other firms such that no one firm could unilaterally restrict output to spawn supracompetitive prices. Having established a well controlled data set with price spikes paralleling those observed in the naturally occurring economy, we also extend the design to include demand-side bidding. We find that demand-side bidding completely neutralizes the exercise of market power and eliminates price spikes even in the presence of structural market power.electric power deregulation ͉ experimental economics T he privatization movement in the electricity industry began in Chile and the United Kingdom in the 1980s and spread to many other countries by the mid-1990s. The U.S. industry joined this trend when California and other states legislated the introduction of competition in the production of electrical energy. This deregulation, however, has dealt most immediately with the wholesale market, not the prices paid by the end-use consumer, whose rates typically are not time-variable throughout the day, week, and season. This has been the crux of the problem, because wholesale energy costs alone vary from peak to off-peak by a factor of 6 or more on normal summer days of high-load demand. Consequently, the local distributor provides a time-average cost buffer, which in effect subsidizes peak consumption while taxing off-peak consumption. In one of our experimental treatments we relax this artificial constraint by introducing price-responsive demand-side bidding, which we use to compare with the usual supply-side auction mechanism both with and without the presence of market power in generation ownership.Market power was an issue in the United Kingdom from the outset of privatization, which created five independent sources of energy: two private generation companies, the nuclear units retained by the Crown, and import competition on transmission lines connecting the United Kingdom grid with France and Scotland. Competition, however, was compromised by three considerations. Capacity on the interconnect lines to Scotland and France was too small to be a competitive factor. Nuclear energy provided only low-cost baseload capacity and was not competitive at the short-run margin. All load following capacity, which represents the critical marginal generator units, was owned by the two new generator companies created by privatization. Finally, no technical provision was made under privatization to mandate or encourage demand-side bidding im...