Market power in a deregulated electrical industry

Abstract

We study the behavior of prices, efficiency and wholesale buyer and seller profitability using paid human subjects in a two-sided sealed bid–offer (SBO) spot market bidding mechanism on a three-node radial supply system. Market power issues are addressed by comparing three with six remote generation firms. Key features of the supply/demand environment were developed through the authors' interactions with industry executives in a series of workshops sponsored in our laboratory: demand cycled through three levels, with a large spike of must-serve uninterruptible peak power requiring buyers to bid more than their resale values (and lose money) to obtain adequate power if they were to avoid outage penalties; off-peak generator companies had excess must-run baseload capacity and had to bid at or below marginal cost to avoid shut-down penalty costs; at mid-level shoulder demand both sides of the market were loss-free. In this stressful environment, efficiency is remarkably high, prices highly competitive, and we observe no significant difference in the measured performance criteria between three and six firms.