Energy auctions and market power: an experimental examination

Testing auction mechanisms experimentally in a controlled environment provides an inexpensive means for evaluating their relative merits. The first part of this paper focuses on the comparison of three different auctions with regard to market efficiency and pricing, given scenarios with two, four, and six competitors. Though the uniform price last accepted offer auction was superior overall, the number of competitors proved to be a more significant factor in determining auction performance. Significant exploitation of market power was observed in the duopoly case. The second part of the paper focuses on a transmission network with six sellers in which network constraints give rise to market power opportunities. Experimental evidence based on tests with student and expert subjects show exploitation of this strategic advantage. Several other scenarios are described in which the transmission network creates market power.