Uniform price vs. pay-as-bid auctions in energy markets

Question

These two types of auctions are most commonly used in the energy trading markets. What would be advantages and disadvantages of each? And in the end, can we expect them to deliver similar outcome?

One, quite obvious disadvantage of PAB auction is the need to "guess the clearing price". If not all generators correctly predict the MCP, more expensive generators may be scheduled at the expense of cheaper ones, resulting in higher costs for the same payment by consumers. But what can be considered as a disadvantage of uniform price auction here? And what are the advantages of each auction type?

As for the second question, I think we can expect the same (or at least very similar) outcome when we consider the perfect competition? Under perfect competition all players would know what the marginal production unit is for any given level of demand, so that under pay-as-bid they would all bid at the marginal cost of that unit - achieving the same outcome they would obtain under uniform price auction by bidding at cost. How would the outcome change if we consider (bit more realistic) case of oligopoly?

Answer 1

I believe "Auctions of Homogeneous Goods: A Case for Pay-as-Bid" by Pycia and Woodward answers your questions theoretically. This is quite recent and their results are striking. They also briefly discuss some empirical insights.

The pay-as-bid (or discriminatory) auction is a prominent format for selling homogenous goods such as treasury securities and commodities. We prove the uniqueness of its pure-strategy Bayesian Nash equilibrium and establish a tractable representation of equilibrium bids. Building on these results we analyze the optimal design of pay-as-bid auctions, as well as uniform-price auctions (the main alternative auction format) allowing for asymmetric information. We show that supply transparency and full disclosure are optimal in pay-as-bid, though not necessarily in uniform-price; pay-as-bid is revenue dominant and might be welfare dominant; and, under assumptions commonly imposed in empirical work, the two formats are revenue and welfare equivalent.