Abstract
AbstractThe assumption of expected profit‐maximizing bidding behavior in a multi‐unit, multi‐period auction with step‐function supply curves is used to estimate cost functions for electricity generation units and derive tests of expected profit‐maximizing behavior. Applying these techniques to data from the National Electricity Market in Australia reveals statistically significant evidence of output‐dependent marginal costs within and across half‐hours of the day, but no evidence against the hypothesis of expected profit‐maximizing behavior. These cost function estimates quantify the economic significance of output‐varying costs and how forward financial contract obligations impact the amount of these costs the generation unit owner incurs. This supplier's existing obligations imply average daily production costs that are 8% lower than the profit‐maximizing pattern of output with no forward contract obligations. Copyright © 2007 John Wiley & Sons, Ltd.
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