Strategic Bidding in Electricity Pools with Short-Lived Bids: An Application to the Spanish Market

Abstract

We generalize von der Fehr and Harbord’s [Econ. J. 103 (1993) 531] multi-unit auction model for the case of a deterministic demand allowing for any technology mix and elastic demand in order to account for demand-side bidding. We obtain a general characterization of the equilibrium and show that this is bounded above by the Cournot equilibrium. We simulate the Spanish electricity pool and show that price–cost margins substantially increased with the 1996 merger that took the industry from a six-firm structure to its current four-firm structure. Our results show that, in terms of market power, this is similar to a nearly symmetric duopoly. The introduction of demand-side bidding is not likely to change this situation.