Design and Testing of an Auction for Non-Convex Cost Environments

Abstract

Van Boening and Wilcox ran experiments finding that the ordinarily robust Double Auction produced inefficient results in an environment characterized by a small number of sellers with non-convex cost structures (i.e. large avoidable fixed costs, zero incremental costs, and production quantity limits). Advances in computation provide opportunities for new ways to transact multilaterally, which may facilitate efficient production in such environments. In the context of electricity markets, novel competitive institutions have evolved that execute multilateral trading in environments with nonconvexities. My experiments use an institution called a Quasi-Uniform Price Auction (“QUPA”), which is modeled after mechanisms that are currently used in electricity auctions. When tested in environments with non-convex cost structures, the QUPA is in some cases more efficient than the Double Auction and the Smart Market, which is another computationally intensive multilateral trading institution. These results suggest that further experimental research on QUPAs would provide useful lessons for the future design of electricity auctions.