Double Auctions Across a Constrained Transmission Line

Abstract

Auctions are a common price-setting mechanism in many areas of the economy. Certain auctions, for example those in deregulated electric power networks, require that there exist sufficient capacity along the power lines connecting the buyers and the sellers. We investigate how auction participants modify their bidding strategies depending on the influence and behavior of a transmission line owner. We also investigate optimal strategic behavior when multiple buyers and sellers are separated by a possibly-constrained channel, and show that both sides’ strategies converge to truth-telling behavior as the number of market participants increases, and price-taking behavior also emerges as the number of participants increases. We show that limited transmission capacity increases participants’ misrepresentation and increases auction inefficiency, as players modify their bidding strategies in an attempt to increase their profit.