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Journal of Regulatory Economics

Supply Function Equilibria of Pay–as–Bid Auctions

Scientific Article in English
Holmberg, Pär (2009). “Supply Function Equilibria of Pay–as–Bid Auctions”. Journal of Regulatory Economics 36(2), 154–177.

Pär Holmberg

This paper characterizes the Nash equilibrium in a pay-as-bid (discriminatory), divisible-good, procurement auction, Demand by the auctioneer is uncertain as in tbe supply function equilibrium model. A closed form expression is derived for a one shot game. Existence of an equilibrium is ensured if tbe hazard rate of the demand distribution is monotonically decreasing witb respect to the shock outcome and sellers have non-decreasing marginal costs. Multiple equilibria can be ruled out for markets, for which tbe auctioneer's demand exceeds suppliers' capacity with a positive probability. The derived equilibrium can be used to model strategic bidding behavior in pay-as-bid electricity auctions, such as tbe balancing mechanism of United Kingdom. Offer curves and mark-ups of the derived equilibrium are compared to results for the SFE of a uniform-price auction.

Pär Holmberg

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