Auctions with Privately Known Capacities: Understanding Competition among Renewables

Abstract

We study a multi-unit auction model in which bidders are privately informed about the maximum number of units they are willing to trade (which we refer to as ‘capacity’). No matter how big or small, private information on capacities changes the nature of the equilibrium as compared to when private information is on costs (or valuations). Also, the uniform-price and discriminatory auctions are not revenue equivalent, in contrast to when costs are independently drawn. In particular, with independently drawn capacities (and possibly costs), the discriminatory format reduces payments to firms relative to the uniform-price format. Our analysis is motivated by the performance of future electricity markets in which renewable energies will be predominant, but the setup also applies to a variety of contexts (from central bank liquidity auctions to emissions trading).