Market Design, Bidding Rules, and Long Memory in Electricity Prices

In uniform price, sealed-bid, day-ahead electricity auctions, the market price is set at the intersection between aggregate demand and supply functions constructed by a market operator. Each day, just one agent the marginal generator owns the market-clearing plant. Moreover, day-ahead auctions are embedded in multi-segment systems, wherein diverse protocols coexist and change over time. This complex environment leads to adoption of simple, adaptive bidding rules. Specifically, such a market design enables the emergence of two different types of routines, depending on whether the agent is a likely marginal or inframarginal generator. However, because of the uniform price mechanism, only the bidding behavior of the former can be reflected into market prices. Depending on the specific way marginal generators process past information to set their bids ’hyperbolic’ or ’exponential’ electricity prices are likely to display longor short-memory. Using an analogy with the hyperbolic discounting a quite robust behavioral bias in humans a long-memory view of electricity prices can be supported. This Laboratory of Economics and Management, S. Anna School of Advanced Studies, Pisa, and DSGSS, University of Teramo. Email: [email protected]. Support by the Advanced School for Public Administration, Rome (project ”Politiche per la regolazione dei servizi di pubblica utilita’. L’attuazione degli indirizzi dell’Unione Europea nella riforma del settore energetico italiano alla luce della specificit nazionale”), and by the Italian Ministry of Education, University and Research (project ”Forme istituzionali ed organizzazione nella risoluzione dei problemi complessi” COFIN 2002) is gratefully acknowledged. Thanks to Giulio Bottazzi, Giovanni Dosi, and Andrea Roventini. The usual disclaimer applies.