A study of basic bidding strategy in clearing pricing auctions

This paper models bidding behaviors of suppliers in electricity auction markets under clearing pricing rule and with some simplified bidding assumptions. Optimal bidding strategy of suppliers is derived by solving a set of differential equations that specify the necessary conditions for bidders to maximize their expected payoffs. The derived result indicates that bidders have incentives to mark up their bids above their costs of production. The amount of markup depends on the probability of winning below and on the margin that are computed from the cost distribution of all suppliers, market demand, and the number of suppliers participating in the auction.