Today’s Opinion Journal has a commentary by Art Laffer and Patrick Giordano on proposed wholesale power procurement auctions in Illinois. They claim that the uniform price reverse auction (in which the price falls until Q supplied=Q demanded, and all suppliers still in the market receive the market-clearing price) is a ComEd setup that’s tailor-made for suppliers to collude and for ComEd’s generation company to get a higher price than they would receive under another auction design. Laffer and Giordano recommend, instead, a pay-as-offer reverse auction, in which (I suppose, but the article is not entirely clear on the design points) the suppliers drop out as the auctioneer ticks down the price, stopping when the last supplier drops out. Then the auctioneer goes back up that offer curve to where the quantity demanded equals the quantity supplied, chooses the suppliers that submitted the lowest offers, and you’re done. Laffer and Giordano argue that such an auction would deliver lower prices to consumers.
Not necessarily. Laffer and Giordano assume that suppliers will reveal their reservation prices truthfully. But we have decades of field and experimental data to show that pay-as-bid/pay-as-offer auctions induce participants to misrepresent their true values. Think about it: if you know that you are going to receive exactly what you offer, are you going to offer at your marginal cost? Heck no! You are going to shade your offer upward. In experiments ranging from Treasury bond auctions to wholesale power markets, there’s a four-decade-long experimental literature exploring the intricacies of uniform vs. pay-as-bid auctions, and in general uniform price auctions are more efficient, although whether the buyers or the sellers benefit more depends on the application.
Their point about sharing offer information with participants in real time is a valid point, and worthy of research. Their point that the proposed procurement auction favors ComEd’s generation company is uncontroversial. But they miss the point entirely when they assume that suppliers will make truthful offers in a pay-as-offer reverse auction. It’s a fatal assumption, not borne out in reality or in the laboratory.