Strategic Behavior in Smart Markets with Avoidable Fixed Costs: an Experimental Study

Previous research of complex-offer auctions designed for deregulated electricity markets finds that offer complexity allows great deal of strategic behavior, which consequently leads to anti-competitive and inefficient outcomes. In these smart markets that employ complex-offer auctions, the sellers submit not only quantities and minimum prices at which they are willing to sell, but also start-up fees that are designed to reimburse the fixed start-up costs of the electric power generators. Using an experimental approach, I compare the performance of two complex-offer auctions against the performance of a simple-offer auction, in which the sellers have to recover all their generation costs – variable and fixed – through a uniform market-clearing price. I find that the simple-offer auction significantly reduces consumer prices and lowers price volatility. It mitigates anti-competitive effects that are present in complex-offer auctions and achieves allocative efficiency more quickly.