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Open Access item Tacit Collusion and Capacity Withholding in Repeated Uniform Price Auctions

Authors:Dechenaux, Emmanuel
Kovenock, Dan
Keywords:Auction, Capacity, Collusion, Electricity Markets, Supply Function
Issue Date:1-Mar-2005
Series/Report no.:UFAE and IAE Working Papers
645.05
Abstract:This paper contributes to the study of tacit collusion by analyzing infinitely repeated multiunit uniform price auctions in a symmetric oligopoly with capacity constrained firms. Under both the Market Clearing and Maximum Accepted Price rules of determining the uniform price, we show that when each firm sets a price-quantity pair specifying the firm's minimum acceptable price and the maximum quantity the firm is willing to sell at this price, there exists a range of discount factors for which the monopoly outcome with equal sharing is sustainable in the uniform price auction, but not in the corresponding discriminatory auction. Moreover, capacity withholding may be necessary to sustain this out-come. We extend these results to the case where firms may set bids that are arbitrary step functions of price-quantity pairs with any finite number of price steps. Surprisingly, under the Maximum Accepted Price rule, firms need employ no more than two price steps to minimize the value of the discount factor above which the perfectly collusive outcome with equal sharing is sustainable on a stationary path. Under the Market Clearing Price rule, only one step is required. That is, within the class of step bidding functions with a finite number of steps, maximal collusion is attained with simple price-quantity strategies exhibiting capacity withholding.
URI:http://hdl.handle.net/10261/1759
Appears in Collections:(IAE) Informes y documentos de trabajo

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