Price caps and fluctuating demands in electricity markets: Experimental evidence of competitive bidding

Abstract

This paper reports results from a laboratory experiment designed to test how competitive behavior is sensitive to price cap and demand level in a uniform price auction. Several features of the electricity markets inspire the experimental design. Two treatments with different price caps are considered and demand is high in certain periods, and low in others. In addition the market is characterized by excess capacity regardless of the demand level and competitive outcome is predicted. Although attempts to collude do take place, these fail to increase market prices in any substantial way. Despite this, inefficiencies do occur as the attempts at colluding imply that marginal costs fail to equalize across firms. This allocative inefficiencies appear to be more severe, both when the demand is high and when the price cap is high.