Bidding and Investment in Wholesale Electricity Markets: Discriminatory versus Uniform-Price Auctions

Résumé

We compare uniform and discriminatory-price auctions in wholesale electricity markets, studying both long-run investment incentives and short-run bidding behaviors. We develop a monopolistic competition model with a continuum of generation technologies ranging from base load to peak load, free entry and uncertain elastic demand. Our findings reveal that discriminatory-price auctions are inefficient because consumers’ willingness to pay exceeds the marginal costs and investment incentives are distorted. Despite having an equal total installed capacity, the generation mix under discriminatory-price auctions skews towards a shortage of base-load technologies. Consequently, this results in a lower long-run consumer surplus.