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Price instability in multi-unit auctions

Price instability means that producers change the price of their production drastically with small cost changes, for example minor changes in fuel prices. In this article we develop a theoretical model that shows that price instability is expected to cause price fluctuations of 1–10 percent of the spot price when demand is high, while price stability is higher when demand is low. Price instability is unfortunate as it creates uncertainty in the market. Based on the analysis, one can identify methods that should reduce these price fluctuations. Among other things, price stability increases if producers are allowed to report more price and quantity pairs than is the case in many markets today, so that a producer can describe his supply more precisely.

Project manager
Pär Holmberg

+46 (0)8 665 4559
+46 (0)72 511 6866
par.holmberg@ifn.se

Project participants
Edward Anderson, University of Sydney