Market power in a deregulated electrical industry

We study the behavior of prices, efficiency acid wholesale buyer and seller profitability using paid human subjects in a two-sided sealed bid-offer (SBO) spot market bidding mechanism on a three-node radial supply system. Market power issues are addressed by comparing three with six remote generation firms. Key features of the supply/demand environment were developed through the authors' interactions with industry executives in a series of workshops sponsored in our laboratory: demand cycled through three levels, with a large spike of must-serve uninterruptible peak power requiring buyers to bid more than their resale values land lose money) to obtain adequate power if they were to avoid outage penalties; off-peak generator companies had excess must-run baseload capacity and had to bid at or below marginal cost to avoid shut-down penalty costs; at mid-level shoulder demand both sides of the market were loss-free. In this stressful environment, efficiency is remarkably high, prices highly competitive, and we observe no significant difference in the measured performance criteria between three and six firms. (C) 2001 Elsevier Science B.V. All rights reserved.