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 (S BO) spot market bidding mechanism on a three-node radial supply system. Mar ket power issues are addressed by comparing three with six remote generatio n firms. Key features of the supply/demand environment were developed throu gh the authors' interactions with industry executives in a series of worksh ops sponsored in our laboratory: demand cycled through three levels, with a large spike of must-serve uninterruptible peak power requiring buyers to b id more than their resale values land lose money) to obtain adequate power if they were to avoid outage penalties; off-peak generator companies had ex cess 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 rem arkably high, prices highly competitive, and we observe no significant diff erence in the measured performance criteria between three and six firms. (C ) 2001 Elsevier Science B.V. All rights reserved.