DP6756 On the Impact of Forward Contract Obligations in Multi-Unit Auctions

Author(s): Maria-Angeles de Frutos, Natalia Fabra
Publication Date: March 2008
Keyword(s): antitrust remedies, discrete bids, electricity, Forward contracts, market power, multi-unit auctions, simulations
JEL(s): G13, L13, L94
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6756

Several regulatory authorities worldwide have recently imposed forward contract obligations on electricity producers as a way to mitigate their market power. In this paper we investigate how such contractual obligations affect equilibrium bidding in electricity markets, or in any other auction-based market. For this purpose, we introduce forward contracts in a uniform-price multi-unit auction model with complete information. We find that forward contracts are pro-competitive when allocated to relatively large and efficient firms; however, they might be anti-competitive otherwise. We also show that an increase in contract volume need not always be welfare improving. From a methodological point of view, we aim at contributing to the literature on multi-unit auctions with discrete bids.