TY  - JOUR
AU  - Hortacsu,Ali
AU  - Puller,Steven L.
TI  - Understanding Strategic Bidding in Restructured Electricity Markets: A Case Study of ERCOT
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11123
PY  - 2005
Y2  - February 2005
UR  - http://www.nber.org/papers/w11123
L1  - http://www.nber.org/papers/w11123.pdf
N1  - Author contact info:
Ali Hortacsu
Department of Economics
University of Chicago
1126 East 59th Street
Chicago, IL  60637
Tel: 773/702-5841
E-Mail: hortacsu@uchicago.edu

Steven L. Puller
Department of Economics
Texas A&M University
3046 Allen
College Station, TX 77843-4228
Tel: 979/845-7349
Fax: 979/847-8757
E-Mail: puller@econmail.tamu.edu
AB  - We examine the bidding behavior of firms competing on ERCOT, the hourly electricity balancing market in Texas. We characterize an equilibrium model of bidding into this uniform-price divisible-good auction market. Using detailed firm-level data on bids and marginal costs of generation, we find that firms with large stakes in the market performed close to theoretical benchmarks of static, profit-maximizing bidding derived from our model. However, several smaller firms utilized excessively steep bid schedules that deviated significantly from our theoretical benchmarks, in a manner that could not be empirically accounted for by the presence of technological adjustment costs, transmission constraints, or collusive behavior. Our results suggest that payoff scale matters in firms' willingness and ability to participate in complex, strategic market environments. Finally, although smaller firms moved closer to theoretical bidding benchmarks over time, their bidding patterns contributed to productive inefficiency in this newly restructured market, along with efficiency losses due to the close-to optimal exercise of market power by larger firms.
ER  -