Providing Uncertain Quantities Efficiently: Theory and Applications to Electricity Deregulation

57 Pages Posted: 23 Nov 1999

See all articles by Kala Krishna

Kala Krishna

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Torben Tranaes

Rockwool Foundation Research Unit; Danish National Institute of Social Research (SFI); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: October 1999

Abstract

This paper studies situations where a single buyer with uncertain demand wishes to buy from a small number of suppliers. In this setting it is well understood that supply function bidding results in the product not being produced at the lowest cost, that is, in the loss of production efficiency. We show that not only is production efficiency obtained, but entry and cost reducing investment are also optimal if suppliers are allowed to bid both a payment contingent on the quantity supplied and a payment contingent on the realization of total demand. We discuss our scheme in the context of electricity deregulation and evaluate some of the latest reforms within the industry in the light of our results. We also show that our results can be reinterpreted in the multi-unit auction setting with random supply, a single seller and multiple buyers.

JEL Classification: C7, D4, L5

Suggested Citation

Krishna, Kala and Tranaes, Torben, Providing Uncertain Quantities Efficiently: Theory and Applications to Electricity Deregulation (October 1999). Available at SSRN: https://ssrn.com/abstract=192548 or http://dx.doi.org/10.2139/ssrn.192548

Kala Krishna (Contact Author)

Pennsylvania State University - Department of Economics ( email )

523 Kern Graduate Building
University Park, PA 16802-3306
United States
814-865-1106 (Phone)
814-863-4775 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Torben Tranaes

Rockwool Foundation Research Unit ( email )

Sejroegade 11
DK-2100 Copenhagen
Denmark
+45 39 17 38 31 (Phone)

HOME PAGE: http://www.rff.dk/organi/tt.htm

Danish National Institute of Social Research (SFI) ( email )

Herluf Trolles Gade 11
DK-1052 Kopenhagen
Denmark

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
474
Abstract Views
1,850
rank
73,473
PlumX Metrics