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Bidding Behavior when One Bidder and the Auctioneer Are Vertically Integrated Implications for the Partial Deregulation of EU Electricity Markets

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  • Silvester van Koten
Abstract
When a bidder (referred to as the privileged bidder) is residual claimant to a part of the revenue from an auction with two bidders whose valuations are independently and identically distributed, bidding incentives are changed. Specifically, the privileged bidder will bid more aggressively to increase the auction revenue. Indeed, the privileged bidder is more likely to win the auction and the good is sold for a higher price. However, since the auction is now inefficient, welfare is decreased. These results are of interest for regulators of the EU electricity industry. The extant EU regulatory framework allows for profits from new cross-border transmission lines (socalled interconnectors) to be unregulated and for incumbent Vertically Integrated Utilities (VIUs) to have ownership of generating and transmission activities. When electricity generators have to secure transmission rights in an auction, the VIU, because of its combined ownership of generation and transmission activities, is in the position of a privileged bidder. The VIU will secure a higher profit, while competing electricity generators will earn less because they are less likely to gain transmission rights and, in any case, pay a higher price for it.

Suggested Citation

  • Silvester van Koten, 2006. "Bidding Behavior when One Bidder and the Auctioneer Are Vertically Integrated Implications for the Partial Deregulation of EU Electricity Markets," CERGE-EI Working Papers wp313, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp313
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    File URL: http://www.cerge-ei.cz/pdf/wp/Wp313.pdf
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    References listed on IDEAS

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    1. Paul Joskow & Jean Tirole, 2005. "Merchant Transmission Investment," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 233-264, June.
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    6. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
    7. Leautier, Thomas-Olivier, 2001. "Transmission Constraints and Imperfect Markets for Power," Journal of Regulatory Economics, Springer, vol. 19(1), pages 27-54, January.
    8. Silvester van Koten, 2007. "Legally Separated Joint Ownership of Bidder and Auctioneer: Illustrated by the Partial Deregulation of the EU Electricity Markets," CERGE-EI Working Papers wp346, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    9. Hogendorn, Christiaan, 2003. "Collusive Long-Run Investments under Transmission Price-Caps," Journal of Regulatory Economics, Springer, vol. 24(3), pages 271-291, November.
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    11. repec:adr:anecst:y:2008:i:90:p:09 is not listed on IDEAS
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    Cited by:

    1. Silvester van Koten, 2007. "Legally Separated Joint Ownership of Bidder and Auctioneer: Illustrated by the Partial Deregulation of the EU Electricity Markets," CERGE-EI Working Papers wp346, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. Michal Mravec, 2007. "Understanding the Lack of Competition in Natural Gas Markets: The Impact of Storage Ownership and Upstream Competition," CERGE-EI Working Papers wp342, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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    Keywords

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    JEL classification:

    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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