5 April 8 Auctioning and Updating - Today :Designand...

4/8/2014
1
• Today:
– Brief discussion of auction design.
– Market based emissions regulation: Design and
implementation.
• Readings for today: Goulder papers (required);
Phaneuf chapter (optional). See syllabus for
complete reference.
• Thursday: Stakeholder meeting!!
• Round 2 bids due tonight: Uniform price
auction!!
Round 1 : Pay ‐ as ‐ bid auction

4/8/2014
2
HOUR 1
Wednesday Friday
Demand : 11,013 MW
Marginal Price : $41.50
Demand : 11,013 MW
Marginal Price : $39.47
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PRICE1
0 5000 10000 15000 20000
cummw
0
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PRICE1
0 5000 10000 15000 20000
cummw
Why are some firms bidding in at $0 when this is a pay ‐ as ‐ bid auction??
Is this a good strategy?
HOUR 2
Wednesday Friday
Demand : 15,659 MW
Marginal Price : $45
Demand : 15,659 MW
Marginal Price : $53
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PRICE2
0 5000 10000 15000 20000
cummw
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PRICE2
0 5000 10000 15000 20000
cummw

4/8/2014
3
HOUR 3
Wednesday Friday
Demand : 20,141 MW
Marginal Price : $58
Demand : 20,141 MW
Marginal Price : $447 (!!)
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80
PRICE3
0 5000 10000 15000 20000
cummw
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PRICE3
0 5000 10000 15000 20000
cummw
Why is the price so different across Wednesday/Friday?
HOUR 4
Wednesday Friday
Demand : 17,059 MW
Marginal Price : $55.94
Demand : 17,059 MW
Marginal Price : $47
0
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60
80
PRICE4
0 5000 10000 15000 20000
cummw
0
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PRICE4
0 5000 10000 15000 20000
cummw

4/8/2014
4
Quiz # 1
How (if at all) did your bidding strategy change
between the uniform price auction (practice
round 0) and the pay as bid auction design
(round 1)?
Briefly explain the rationale for this change.
Two common forms of multi ‐ unit auctions
• Sealed bid uniform price
– ESG practice round
• Sealed bid discriminatory (pay ‐ as ‐ bid)
– ESG Round 1

4/8/2014
5
Multi ‐ unit auctions finance
government debt
• To finance the public debt, the U.S. Treasury sells
bonds, Treasury Inflation ‐ Protected Securities
(TIPS), etc. to institutional and individual
investors through public auctions.
• Treasury auctions occur regularly.
• Treasury accepts competitive bids in ascending
order of their rate, yield, or discount margin
(lowest to highest) until the quantity of awarded
bids reaches the offering amount.
Multi ‐ unit auctions – Treasury bills
• In both uniform and discriminatory auctions,
bidders submit bid curves which specify how
many bonds they would purchase at a given
price.
• Bonds are allocated to highest bids.
• Result: bonds are allocated to those who value
them most.

4/8/2014
6
Multi ‐ unit auction design
• Prior to 1993, auctions of government bonds (treasury
bills) were all of the discriminatory (pay ‐ as ‐ bid) type.
• Government accepts competitive bids in ascending
order of their rate (lowest to highest) until the quantity
of awarded bids reaches the offering amount.
• Nobel prize winners, Merton Milller and Milton
Friedman, led a campaign to change the auction design
from discriminatory to a uniform ‐ price auction.
Leading economists advocate a change
to a uniform price auction in order to
reduce the government’s cost of
borrowing.