Unit-Price Procurement Auctions: Structural Results and Comparisons.

Motivated by the wholesale electricity auctions, this dissertation studies a series of unit-price procurement models, with a focus on the impacts of suppliers’ capacity constraints and system uncertainties. We first analyze a basic model with symmetric bidders and symmetric information. The objectives are: to identify most significant drivers of high price volatility in electricity auctions, and compare two auction formats, uniform and discriminatory ones, used in the United States and the United Kingdom respectively. We show that, price dispersion may result from electricity suppliers’ randomized bidding within the prevailing mixed-strategy equilibrium. Surprisingly, demand uncertainty modestly influences price dispersion. We demonstrate that the two auction formats yield the same average price, but the discriminatory auction results in lower price volatility and, therefore, dominates uniform auction. We then extend the results for the discriminatory auction to the case with multiple asymmetric bidders. Several results describing the structure of mixed-strategy equilibria are established: (a) all active suppliers randomize their bids within their price intervals, (b) for suppliers with the same cost, their bidding intervals have a nested structure, (c) there exists a market leader whose bidding interval covers those of the other players and she is usually the one with the highest capacity, (d) when demand increases, the lower bound of market leader increases continuously, while the upper bound jumps from one discrete cost level to another; thus, the price range expands and contracts alternately. Finally, to reflect the reality of electricity auctions, we study the impact of information asymmetry about suppliers’ costs and capacities. We show that when each supplier’s cost is privately known, the equilibrium bidding strategy is driven by suppliers’ relative size and uncertainty about costs. We generalize the basic model and establish revenue (payment) equivalence between uniform and discriminatory auctions. When the private information is suppliers’ capacities, the expected payments of the two auctions are not the same. For discriminatory auctions, monotone equilibrium always exists, where suppliers’ bids decrease and revenues increase in capacity. For uniform auctions, monotone equilibrium always exists for duopoly, but may not exist for three or more suppliers.PhDBusiness AdministrationUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/63695/1/husz_1.pd