Pivotal Suppliers and Market Power in Experimental Supply Function Competition

Brandts, Jordi; Reynolds, Stanley S.; Schram, Arthur

doi:10.1111/ecoj.12058

Cited by 31 publications

(27 citation statements)

References 29 publications

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“…This guarantees that problem (66) has a unique optimal solution that is nonnegative elementwise, which, in turn, implies the optimality of this solution for problem (15). Let x ∈ R N + be the unique optimal solution to problem (66), which is a convex program with linear constraints. It follows that there exist Lagrange multipliers λ ∈ R and µ ∈ R 2m + such that the following conditions are satisfied.…”

Section: Appendix C Proof Of Propositionmentioning

confidence: 97%

A Structural Characterization of Market Power in Electric Power Networks

Lin

Bitar

2020

IEEE Trans. Netw. Sci. Eng.

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We consider a market in which capacity-constrained generators compete in scalar-parameterized supply functions to serve an inelastic demand spread throughout a transmission constrained power network. The market clears according to a locational marginal pricing mechanism, in which the independent system operator (ISO) determines the generators' production quantities to minimize the revealed cost of meeting demand, while ensuring that network transmission and generator capacity constraints are met. Under the stylizing assumption that both the ISO and generators choose their strategies simultaneously, we establish the existence of Nash equilibria for the underlying market, and derive an upper bound on the allocative efficiency loss at Nash equilibrium relative to the socially optimal level. We also characterize an upper bound on the markup of locational marginal prices at Nash equilibrium above their perfectly competitive levels. Of particular relevance to ex ante market power monitoring, these bounds reveal the role of certain market structures-specifically, the market share and residual supply index of a producer-in predicting the degree to which that producer is able to exercise market power to influence the market outcome to its advantage. Finally, restricting our attention to the simpler setting of a two-node power network, we provide a characterization of market structures under which a Braess-like paradox occurs due to the exercise of market power-that is to say, we provide a necessary and sufficient condition on market structure under which the strengthening of the network's transmission line capacity results in the (counterintuitive) increase in the total cost of generation at Nash equilibrium.

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Section: Appendix C Proof Of Propositionmentioning

confidence: 97%

A Structural Characterization of Market Power in Electric Power Networks

Lin

Bitar

2020

IEEE Trans. Netw. Sci. Eng.

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“…Holmberg et al (2013) provide a foundation for the continuous approach as an approximation to the discrete supply bids in a spot market. In their experimental work, Brandts et al (2014) …nd that observed behavior is more consistent with a supply function model than with a discrete multi-unit auction model.…”

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confidence: 90%

Market Power and Welfare in Asymmetric Divisible Good Auctions

Manzano

Vives

2016

SSRN Journal

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We analyze a divisible good uniform-price auction that features two groups each with a …nite number of identical bidders. At equilibrium the relative market power (price impact) of a group increases with the precision of its private information and declines with its transaction costs. An increase in transaction costs and/or a decrease in the precision of a bidding group's information induces a strategic response from the other group, which thereafter attenuates its response to both private information and prices. A "stronger" bidding group -which has more precise private information, faces lower transaction costs, and is more oligopsonistic-has more price impact and so will behave competitively only if it receives a higher per capita subsidy rate. When the strong group values the asset no less than the weak group, the expected deadweight loss increases with the quantity auctioned and also with the degree of payo¤ asymmetries. Price impact and the deadweight loss may be negatively associated. The results are consistent with the available empirical evidence.

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“…Exceptions include the work of Bolle et al (2013), who focus on testing predictions of Supply Function Equilibrium concept, as well as Brandts et al (2014), whose paper compares testable predictions made by various models of how pivotal suppliers affect supply function bidding. In contrast, our experiment focuses on a framework in which market power is driven by a small number of firms, increasing marginal costs, and private information about costs.…”

Section: Related Literaturementioning

confidence: 99%

“…All sessions were computerised. 8 Instructions were read aloud, questions were answered in private, and-throughout the sessions-no communication was allowed between subjects. Instructions explained all details of the market rules, distributional assumptions on the random costs, the nature of signals, and the correlation among costs (the meaning of correlation was explained both with a definition and graphically).…”

Section: Experimental Designmentioning

confidence: 99%

Supply Function Competition, Private Information, and Market Power: A Laboratory Study

Bayona¹,

Brandts

Vives

2017

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. In the context of supply function competition with private information, we test in the laboratory whether-as predicted in Bayesian equilibrium-costs that are positively correlated lead to steeper supply functions and less competitive outcomes than do uncorrelated costs. We find that the majority of subjects bid in accordance with the equilibrium prediction when the environment is simple (uncorrelated costs treatment) but fail to do so in a more complex environment (positively correlated costs treatment). Although we find no statistically significant differences between treatments in average behaviour and outcomes, there are significant differences in the distribution of supply functions. Our results are consistent with the presence of sophisticated agents that on average best respond to a large proportion of subjects who ignore the correlation among costs. Experimental welfare losses in both treatments are higher than the equilibrium prediction owing to a substantial degree of productive inefficiency. Terms of use: Documents inJEL-Codes: C920, D430, L130.

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Pivotal Suppliers and Market Power in Experimental Supply Function Competition

Cited by 31 publications

References 29 publications

A Structural Characterization of Market Power in Electric Power Networks

A Structural Characterization of Market Power in Electric Power Networks

Market Power and Welfare in Asymmetric Divisible Good Auctions

Supply Function Competition, Private Information, and Market Power: A Laboratory Study

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