Working Paper No. 1095

Price Instability in Multi-Unit Auctions

Published: November 27, 2015Pages: 36Keywords: Multi-unit auctions; indivisible unit; price instability; Bayesian Nash equilibria; supply function equilibria; convergence of Nash equilibria; whole-sale electricity marketsJEL-codes: C62; C72; D43; D44; L94

Price Instability in Multi-Unit Auctions Edward Anderson and Pär Holmberg

We consider a procurement auction, where each supplier has private costs and submits a stepped supply function. We solve for a Bayesian Nash equilibrium and show that the equilibrium has a price instability in the sense that a minor change in a supplier.s cost sometimes result in a major change in the market price. In wholesale electricity markets, we predict that the bid price of the most expensive production unit can change by 1-10% due to price instability.

The price instability is reduced when suppliers have more steps in their supply functions for a given production technology. In the limit, as the number of steps increases and the cost uncertainty decreases, the Bayesian equilibrium converges to a pure-strategy NE without price instability, the Supply Function Equilibrium (SFE).

Pär Holmberg


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Sick of Inequality?

An Introduction to the Relationship between Inequality and Health

Sick of Inequality.jpg

In this book Andreas Bergh, Therese Nilsson, IFN and Lund University, and Daniel Waldenström, IFN and Paris School of Economics, France, review the latest research on the relationship between inequality and health. What does inequality mean for our health? Does increasing income inequality affect outcomes such as obesity, life expectancy and subjective well-being?


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