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I am going to participate in a decision committee of a governmental auction in energy market. I want to learn more about how to decide which bid is the best in short/mid/long term.

Can you suggest me a solid source to read/learn about it?

Thanks!

Edit: Private sector is going to bid to rent a geothermal field to construct a power plant and produce electricity.

Edit2: Maybe my question was not clear. If one party is offering high amount of cash + low annual payments and the other body is offerıng low amount of cahs + high annual payments, which one I should accept? How can I do the risk analysis? So on ...

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    $\begingroup$ Hmmm. I'd say talk to auction market designers in places that have had the best successes so far. Mexico, Chile, Germany, Denmark, UK. Out of interest, what's the auction for? A particular generation tech, transmission capacity, flexible generation capacity, something else? $\endgroup$
    – 410 gone
    Commented Jan 2, 2018 at 14:46

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To understand the economics of auctions a little better, I'd recommend taking a look at "Auctions: Theory and Practice" by Paul Klemperer. This book has a number of advantages:

  • with the exceptions of some non-essential appendices, the book is non technical and therefore more accessible to lay-readers. Other texts on auctions tend to be aimed at economics graduate students or above.
  • the book was motivated by Klemperer's experience designing radio spectrum auctions in the UK and discusses applications for public sale/procurement auctions at some length.
  • the book emphasises the main considerations and intuition behind the analysis and design of auctions, rather than the details that are more likely to be of interest to academics rather than participants.

The book can be read free of charge on Klemperer's website here. Alternatively, it is available in print; here is the publisher's page.

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I can only give an answer on the theory behind it, hopefully that will be enough. You can solve this using a game-theoretical framework and a solid source is the classic Fundenberg & Tirole's "Game Theory".

This game depends crucially on the way the bid is structured and if there's any knowledge of how other agents respond. In a typical bid with no extra knowledge, a natural result is that everyone offers the lowest (or almost the lowest) possible price they can afford. Buyers like bids for this reason.

A second enrichment to this theory appears if you can gauge other agents' responses with a signal (previous contracts or quarter reports). In that case, you end up with a probability distribution for other people's prices and the price you'll set will depend on the probability you want of winning the bid.

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  • $\begingroup$ Maybe my question was not clear. If one party is offering high amount of cash + low annual payments and the other body is offerıng low amount of cahs + high annual payments, which one I should accept? How can I do the risk analysis? So on ... $\endgroup$
    – Kutadgubilig
    Commented Jan 2, 2018 at 21:28

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